A Methodical Sukuk Sharia Review (Introduction)
In these series of articles, Hani Abbas Helmy, Head of Sharia Review, for Dubai Islamic Bank, explores the Sukuk Sharia Review process, and proposes ideas as to how to improve the process to make it efficient.
A Sukuk is a certificate that represents a common equal share in an underlying investment transaction or asset. Sukuk are usually structured by Islamic Financial Institutions (IFIs), more particularly their Sharia Boards. The IFI’s Sharia Department aids its Sharia Board in reviewing the documentation in light of the Fatwa/structure issued by the Sharia Board. According to Thomson Reuters, as of 2015 there were 2,354 Sukuk outstanding valued at USD 342 Billion. Each of these Sukuk issuances underwent a thorough Sharia review by the relevant Sharia Departments and its supervising Sharia Board.
However, various IFIs are taking two to four weeks to provide their comments on an issuance of a Sukuk. This comes due to: (a) a limited number of Sharia Reviewers dedicated to reviewing Sukuk issuances in a typical Sharia Department, (b) receiving more than one Sukuk issuance for Sharia Review at the same time (a pipeline clog), (c) occasionally the last minute furnishing of the Sukuk documentation set to the IFI, and (d) lack of a universal methodology for Sukuk Sharia Review.
The purpose of these articles is to devise a fragmented methodical Sharia Review approach taking into consideration the Sukuk’s features, the variety of underlying transactions and the comprehensive set of documentations. This helps break the Sukuk Sharia Review into steps and deliverables, allowing:
- Accelerated reporting of major Sharia concerns, early in the Sharia Review process;
- Enhancing visibility of the Sharia reviewer’s progress for himself and his supervisor;
- Enticing other colleagues in the relevant Sharia department to perform their first Sharia review of a Sukuk issuance, such as, Sharia auditors or Sharia coordinators who are not involved in the process of Sharia review of Sukuk issuances. This group of professionals are the foremost targets of this paper, as an endeavor to increase awareness and build talent and expertise in colleagues in the field of Sharia review and Sharia audit; and
- Ultimately improve the IFIs’ readiness and turnaround time (TAT) for the Sharia review of Sukuk issuances.
Why a Methodical Approach?
There are various types of Sukuk in existence; setting an approach for reviewing each of them from a Sharia perspective is perceived to be impractical. The Dubai Financial Market (DFM) Sharia Standard counts and defines 17 different Sukuk types, whereas, the Accounting & Auditing Organization for Islamic Financial Institutions (AAOIFI) Sukuk Sharia Standard counts and defines 15 different Sukuk types. There are different variants and sub variants, making it a matter of combinations and permutations to arrive at a larger number of Sukuk variants, bearing in mind a combination of two or more such variants (otherwise known as a Hybrid Sukuk). Hence setting a method for each is futile.
The DFM Sukuk Standard covers a few specific rules for different classes of Sukuk amongst Sections 5 and 6 thereof. It gives specific rulings for each of the 17 types of Sukuk it covers across 14 pages, and it is more detailed as compared to AAOIFI’s Sukuk standard that covers broad rulings for each of 13 Sukuk types amongst section 5 of the Sukuk Standard across 10 pages of a larger font and well-spaced lines. However, AAOIFI’s Sukuk Sharia Standard is also backed by another 50+ Sharia Standards, where at least one or more of which is being referred to for the Sharia Review of the Sukuk at hand. i.e. if there is a Mudaraba Sukuk under Sharia review, the Sharia Reviewer refers to the AAOIFI Mudaraba Sharia Standard (13), in conjunction with the AAOIFI Sukuk Sharia Standard (17) and so forth.
Hence with the various Sukuk classes, types, variants and potential Hybrid Sukuk, a standard methodical Sharia Review process is called for, bearing in mind the different personalities of each of these Sukuk variants and building on the existing commonalities from a Sukuk Features perspective.
The articles will focus on different parts of the Sukuk process. Together they will provide the reader a comprehensive understanding of the process and the associated issues. These will include the following:
Part 1: Features of the Sukuk
Part 2: The Documentation for Sukuk
Part 3: The Methodology
Part 4: Structuring the Sukuk Programme
Part 5: Recommendations and Conclusion