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Sukuk and Tawarruq Contracts in Islamic Finance

The Institute of Islamic Banking and Insurance (IIBI) defines Sukuk contracts as having ‘similar characteristics to that of a conventional bond with the key difference being that they are asset backed; Sukuk represents proportionate beneficial ownership in the underlying asset. The asset will be leased to the client to yield the return on the Sukuk. The Sukuk has attracted considerable attention in recent years from Muslims and nonMuslims alike. It is categorized as the ‘Islamic equivalent of a bond’ in Wikipedia (as upto-date and reliable a source as any in the fast-growing area), which also provides the following information on the workings of Sukuk: The essence of Sukuk, in the modern Islamic perspective, lies in the concept of asset monetization – the so-called securitization – that is achieved through the process of issuance of Sukuk (taskeek). Its great potential is in transforming an asset’s future cash flow into present cash flow. Sukuk may be issued on existing as well as specific assets that may become available at a future date. The fact that this new product has been introduced would seem to imply that all other Islamic products have been exhausted or inadequate to the task required. I do not believe this to be the case and feel that some Muslim scholars have rushed into this position without exploring the full potential of existing contracts.

The artificial demand for new products was originally promoted under the cover of ‘Islamic banking’ by Western institutions in an attempt to attract funds from Muslims. If there is any elements of truth in the Friedman Rule – which I, for one, believe to be in conformity with the word of Allah (SWT) – this means that both host and guest economies must have benefited from the fruits of zero nominal rates of interest. But then, we have to ask: Which one of these countries, Islamic or non-Islamic, has full employment, stable prices, equitable distribution of income and wealth, counter-cyclical movements, in relative terms? These are sound and reliable measures to test such claims, because these are the fruits of the absolute negation of interest. For many years, Muslim scholars have concentrated on what constitutes Riba, but in doing so, have completely neglected the fruits of its abolition. We have yet to see even a small city – let alone an entire country – practice the full economic consequences of the abolition of Riba.


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To some respected economists, it appears that Islamic banking has been ‘hijacked by the West’ and that all the major developments of the last decade or so seem to have been directed toward the same end: to collect as much money as is possible, particularly from the oil-producing, Muslim countries. It is no coincidence that “From its tentative beginnings, Islamic banking has mushroomed to the point that huge multi-national banks are rushing to offer Shari’ah compliant versions of their products.’ (Hammoudi: 2007)

For latest information and data on sukuk, see the IslamicBanker Sukuk Monitor. 

Source: Prof. Iraj Toutounchian, Thoughts from Iraj Toutounchian’s Islamic Money & Banking: Narrated by Camille Paldi. Republished with permission.