The workshop began with participants claiming that the definitions of sukuk that the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) and Islamic Financial Services Board (IFSB) have put forward are causing confusion in the markets. AAOIFI defines sukuk as follows: “Investment sukuk are certificates of equal value representing undivided shares in ownership of tangible assets, usufruct and services or (in the ownership of) the assets of particular projects or special investment activity…” (AAOIFI, 2010, p. 307). IFSB describes the process of issuing sukuk as follows:“Securitisation in sukuk is broadly referred to as a process of issuing sukuk involving the following steps: (a) origination of assets…(b) transfer of the assets to a special purpose entity (SPE) which acts as the issuer by packaging them into securities (sukuk); and (c) issuing the securities to investors.”
Some participants were of the view that the prevailing definitions and descriptions of sukuk given by AAOIFI and IFSB inaccurately represent sukuk as an asset-backed securitization. It was argued that the majority of sukuk are not true securitizations. From an English law perspective, most sukuk are unsecured bonds . In the event of default, there is only the Purchase Undertaking Deed (PUD) whereby the originator promises to purchase back the assets at an agreed upon exercise price. Investors usually do not have recourse to the sukuk assets. In a true asset-backed securitization, the security-holders would have recourse to the underlying assets and not to the originator of the sukuk. In the vast majority of cases, sukuk-holders do not have recourse to the sukuk assets—they have recourse to the originator. This raises many important concerns in the market especially with respect to the actual risks involved in investing in such products.
The sale of underlying assets in most sukuk issuances is not a true sale. Deviations from true sale are primarily due to the purchase undertaking and the absence of legal transfer of ownership of the assets sold from the buyer to the purchaser. This view is problematic—if there is no true sale then there is no genuine ownership. In the absence of ownership of the assets, on what basis are the sukuk-holders generating their returns? If one accepts that there is no ownership of the assets by the sukuk-holders and/or there is no true sale, the shariah-compliancy of the product comes under serious doubt in the eyes of many of the participants.