UAE Laws and Islamic Finance

Laws of the UAE and Islamic Finance

Archive for December 4, 2010

AAOFI’s Shariah Board Resolution on Sukuk

Sukuk v Bonds v Shares

In finance, a bond is a debt security, in which the authorized issuer owes the holders a debt and depending on the terms of the bond, is obliged to pay interest (the coupon) and/or to repay the principal at a later date, termed maturity. A bond is a formal contract to repay borrowed money with interest at fixed intervals.[1]

Thus, a bond is like a loan: the issuer is the borrower (debtor), the holder is the lender (creditor), and the coupon is the interest. Bonds provide the borrower with external funds to finance long-term investments, or, in the case of government bonds, to finance current expenditure. Bonds must be repaid at fixed intervals over a period of time. (Wikipedia)

According to the Accounting and Auditing Standards for Islamic Financial Institutions, AAOIFI (, Sukuk are “Certificates of equal value representing, after closing of subscription, receipt of the value of the certificates and putting it to use as planned, common little to shares and rights in tangible assets, usufructs and services, or equity of a special investment activity.”   The principle of fixed return does not apply to Sukuk, however, Sukuk holders may get the fixed return due to the underlying asset or project.  The projects may be guaranteed income and some are derived from the actual cash flow of the project.

In financial markets, a share is a unit of account for various financial instruments including stocks (ordinary or preferential) and investments in limited partnerships and real estate investment trusts. The common feature of all these is equity participation (limited in the case of preference shares). (

A bond can be considered a certificate of indebtedness whereby the issuer is obligated to pay the holder a specific sum of money either semi-annually or at maturity.  The paid sum consists of both the principal and interest irrespective of whether it is zero, coupon bond, or bond with coupon.  The difference between bondholders and stockholders is that the bond holder has a claim against the issuer but has no ownership rights while stockholders have ownership rights.  (Except Convertible Bonds).

In regards to stocks, Investors were given share certificates as evidence of their ownership of shares but certificates are not always issued nowadays. Instead, the ownership may be recorded electronically by a system such as CREST. (wikipedia)

Under a Sukuk structure, the Sukuk holders each hold an undivided beneficial ownership interest in the underlying assets.  Sukuk holders are entitled to a share in the revenues generated by the Sukuk assets.

*Information taken from materials handed out at the Amanie Islamic Finance School Workshop in Dubai, UAE on December 14-15, 2008 and Wikipedia.

Introduction to Islamic Securitization

Tawriq (from wariq) means to render something into cash.  Taskik (from Sakk) is also used as securitization though literally refers to the process of dividing the assets into papers (Sukuk).  Tawriq is defined as: “transforming a deferred debt for the period between the establishment of the debt and the maturity period into papers which can be treated in the secondary market.” (Hammad, Nzaih, in Majallah Majma ‘Al Fiqh’)

Securitization or taskeek in Arabic refers to the process of the division of the ownership of tangible assets or rights to use those assets or both or right to a project into units, which have equal value and the issuance of those units to investors.  In simple terms, securitization describes the process of aggregating assets and packaging them into marketable securities.

Distinction between conventional bond and Islamic Sukuk:

A conventional bond is a contractual debt obligation whereby the issuer is contractually obliged to pay to bond holders, on a certain specified date, interest and principal.  Under a Sukuk structure, the Sukuk holders each hold an undivided beneficial ownership interest in the underlying assets.  Sukuk holders are entitled to a share in the revenues generated by the Sukuk assets.  In sum, Sukuk are monetary denominated participation certificates of equal unit value to be issued to investors to represent their proportionate share in the ownership of the underlying assets and a pro- rata share in the income generated by those assets.

Types of Securities:

  1. Receivables Securitization (Debt Securitization).
  2. Asset-based/project-based/ownership-based/usufruct-based securitization.
  3. Asset-backed securities (i.e.) Securities are backed by established income stream prior to securitization.

Types of Islamic Securities: 

Debt Securities:

  1. Murabahah Papers/ Debt Securities.
  2. Istisna’a Papers/Debt Securities.
  1. Asset-Based Securities:
  1. Sukuk al-Ijarah.
  2. Sukuk al-Musharakah.
  3. Sukuk al- Mudharabah .
  4. Sukuk Istithmar.
  1. Asset-Backed Securities:
  1. Sukuk al-Ijarah.
  2. Murarabah Bond.
  3. Sukuk Musharakah/Mudharabah.

*Information taken from materials handed out at the Amanie Islamic Finance School Workshop in Dubai, UAE on December 14-15, 2008.

Sukuk Al Salam




  1. This is a treasury facility equivalent to a ‘government treasury bill,’ but compliant to Sharia’h principles managed by the Central Bank of Bahrain.
  2. A Special Purpose Vehicle (SPV) will initially issue Sukuk al-Salam to International Financial Institutions (IFI’s), which are looking for short- term investments.  The Sukuk are subscribed to on a cash basis to form the capital/purchase price for the salam commodity.
  3. The Sukuk al-Salam represents the rights of investors/salam purchasers.  IFI’s receive the salam commodity for example after two months pursuant to the execution of the salam contract.  (Pay now, receive the commodities at an agreed upon date in the future).
  4. To mitigate the risk to the investors/IFI’s (market risk) and to effect the fixed income feature of the ‘government treasury bill,’ a third party who is the ultimate commodity purchaser will undertake under wa’d* principle to purchase the  salam commodity from the investors upon the delivery of the commodity to them.
  5. The promised price to be paid by this third party will comprise the principal and profit for the Sukuk Al-Salam investors.

*Wa’d is an undertaking or promise given by the promisor in favor of the promisee.  The wa’d would bind the promisor and not the promisee.  If the promisor were to breach the undertaking, he or she is to compensate the promisee of all the actual damages arising from the breach of the promise.

The Concept of Wa’d in Islamic Finance

*Information taken from materials handed out at the Amanie Islamic Finance School Workshop in Dubai, UAE on December 14-15, 2008.

 Basic features and conditions of Salam

  1. “The transaction is considered Salam if the buyer has paid the purchase price to the seller in full at the time of sale. This is necessary so that the buyer can show that they are not entering into debt with a second party in order to eliminate the debt with the first party, an act prohibited under Shari’ah. The idea of Salam is to provide a mechanism that ensures that the seller has the liquidity they expected from entering into the transaction in the first place. If the price were not paid in full, the basic purpose of the transaction would have been defeated. Muslim jurists are unanimous in their opinion that full payment of the purchase price is key for Salam to exist. Imam Malik is also of the opinion that the seller may defer accepting the funds from the buyer for two or three days, but this delay should not form part of the agreement.
  2. Salam can be effected in those commodities only the quality and quantity of which can be specified exactly. The things whose quality or quantity is not determined by specification cannot be sold through the contract of salam. For example, precious stones cannot be sold on the basis of salam because every piece of precious stones is normally different from the other either in its quality or in its size or weight and their exact specification is not generally possible.
  3. Salam cannot be effected on a particular commodity or on a product of a particular field or farm. For example, if the seller undertakes to supply the wheat of a particular field, or the fruit of a particular tree, the salam will not be valid, because there is a possibility that the crop of that particular field or the fruit of that tree is destroyed before delivery, and, given such possibility, the delivery remains uncertain. The same rule is applicable to every commodity the supply of which is not certain.
  4. It is necessary that the quality of the commodity (intended to be purchased through salam) is fully specified leaving no ambiguity which may lead to a dispute. All the possible details in this respect must be expressly mentioned.
  5. It is also necessary that the quantity of the commodity is agreed upon in unequivocal terms. If the commodity is quantified in weights according to the usage of its traders, its weight must be determined, and if it is quantified through measures, its exact measure should be known. What is normally weighed cannot be quantified in measures and vice versa.
  6. The exact date and place of delivery must be specified in the contract.
  7. Salam cannot be effected in respect of things, which must be delivered at spot. For example, if gold is purchased in exchange of silver, it is necessary, according to Shari’ah, that the delivery of both be simultaneous. Here, salam cannot work. Similarly, if wheat is bartered for barley, the simultaneous delivery of both is necessary for the validity of sale. Therefore the contract of salam in this case is not allowed.”
UAE Laws and Islamic Finance

Laws of the UAE and Islamic Finance