Islamic Securitization by Means of Sukuk and the Struggle for Shari’ah Compliance

Abstract

As the growth and dispersion of Islamic Financial products over the last couple of decades has shown, a large demand for Shari’ah compliant financial products exists. This study shows that Islamic financial products, and sukuk securities in particular as they exist today, mostly do not comply with the basic Shari’ah provisions laid down by Shari’ah specialists and standard setting bodies. These provisions are put in place order to avoid riba (usury) and gharar (excessive risk-taking), and include asset backing of sukuk contracts, the basic principle of profit and loss (PLS) and risk-sharing and the prohibition of coupling returns to investors to benchmark interest rates. The difficulties in making sukuk contracts Shari’ah compliant are placed in the context of the discourse among Shari’ah specialist whether to take a pragmatic or idealist approach to Islamic finance, and the main reason for non-compliance is found to be the tendency of financial practices to mimic western financial practices as these are usually standard setting and unavoidable in today’s globalized financial market.