Part 3: The Methodology

In Part 3, Hani Abbas Helmy, Head of Sharia Review, for Dubai Islamic Bank, breaks down the methodology in undertaking a Sharia review.

The previous sections showed the skeletal Sukuk Features, the prospectus sectional break up, the remaining issuance documents, underlying Sukuk transaction documents and how to deal with them; here we venture into prioritizing the Sharia Review steps.

These steps are as follows:

1. Ensure availability of all the required documents. The Sharia Reviewer runs a quick diagnostic check to ensure all the required documents are in place. In case of missing documents, request their provision as soon as possible. If the missing documents hinder the review of the existing documents, it should be made clear.

It is also worth-while checking the dates and versions of the documents received to ensure they are the latest.

2. Know the parties and ownership structure. This step is divided into two parts:

(A) Initially understand the roles the Issuer, Trustee, Sukukholder and Obligor and Gurantor play in the Sukuk framework.

(B) Recognize the ownership structure of each of them and whether they all stand independent of each other in terms of ownership and control.

If one party owns more than 50% of another party, then they are both treated as one, from a Sharia perspective. This is usually given in the Prospectus under the Overview/General Description of the Offering and the Description of the relevant Party, if any.

Tip: From a Shari’a perspective, plotting a diagram showing the parties on a consolidated basis – if two or more are found to be the same – helps with the subsequent steps.

3. Understand the core Sharia structure(s). The Sharia Reviewer explores the Sharia structure in detail to understand how the top level picture looks. At this level the Sharia Reviewer reviews the following sections of the Prospectus: (a) the Sharia structure and (b) the use of proceeds. These combined are usually 3 to 6 pages.

4. Review the overall structure for Sharia compliance. The Sharia Reviewer knowing what the Underlying Sharia Transaction is envisaged to be, begins assessing it for Sharia compliance. At this level the following sections of the prospectus shall be thoroughly reviewed: (a) the overview of the offering, (b) the Sharia structure, (c) the use of proceeds and (d) the summary of the transaction documents. These combined are usually 15 to 25 pages.
The Sharia Reviewer aims to ascertain that the relevant Sharia Contract:
4.1.1. satisfy its pillars and conditions;
4.1.2. produce its legal effects and consequences;
4.1.3. be implemented in a way that fulfils its Shari’a objective; and
4.1.4. be void of conditions that contradict its essence and Shari’a objectives.

At this step, the Sharia Reviewer documents all his findings on the basic Sharia structure and the summary transaction documents, in a preliminary Sharia review report (the Preliminary Report), in compliance with the relevant AAOIFI Sharia Standard(s) and the decisions of the bank’s Sharia Board, as would be the case in the Sharia Review of any bilateral transaction.

5. Underlying Asset(s) Suitability. The Shari’a Reviewer has to Identify the core underlying asset(s) of the Sukuk, then assess its Sharia compliance and ultimately it’s suitability to be the subject matter of the Underlying Sukuk Transaction. This step is usually fast and easy, and could be grouped within the previous step; however, due to some obligors usually choosing to leave this specific detail confidential until a later point in time, it has been isolated as a step on its own. However, if the details of the underlying asset are readily available, they could be included in the preliminary report.

6. Collateral Impact. If the overall structure is found valid, the Sharia Reviewer assesses the effect of the guarantees and collateral arrangements on the overall structure. The DFM Sukuk Standard stipulates that the “Manager of investment sukuk may guarantee the value of the sukuk assets in case of breach of the agreement (… negligence or misconduct …) or the investment rules stipulated by the sukuk holders. The guarantee shall be of the capital alone and in accordance with the general rules of guarantees.” This matter is similar to reviewing the collateral and guarantees of a bilateral transaction of the same structure. If the collateral arrangement is readily available comments relating to it is included in the Preliminary Report and escalated early-on as these potentially have a significant commercial impact.

7. The Major Phase. Once the overall structure is found to be valid, whether as is or in accordance with guidance of the Sharia Board, the Sharia Reviewer initiates the Sharia review of each transaction document with two core focuses: (i) the basic Sharia contract or promise, as applicable, being reviewed for Sharia testing purposes for each term and/or condition in the relevant document; (ii) the overall interdependence of the relevant term in the document at hand and with (a) any other documents, (b) terms or conditions in any other document, (c) aspects of the overall structure and/or (d) the collateral arrangements.

The Optimal Order. The Sharia Reviewer is advised to follow the following order when conducting the Sharia Review of the remaining documents of the Sukuk issuance at hand:

#Document/SectionWhat to Look for
1Prospectus: Summary of the Transaction documentsTransaction Compliance.
2Prospectus: Financials of ObligorNon-Halal activities.
3Basic Underlying Transaction(s) documentsTransaction Compliance.
4Sukuk Specific Underlying Transaction(s) documentsTransaction Compliance and General Sharia Compliance.
5Prospectus: Terms of the CertificateTransaction Compliance and General Sharia Compliance.
6Prospectus: Feasibility studyTransaction Compliance and General Sharia Compliance.
7Prospectus: SettlementGeneral Sharia Compliance, particularly, interest charges and/or FX Sharia violations.
8Trust DeedEnsure complying with trust/custody requirements (Amana). This may be executed unilaterally or incorporated as part of an agency agreement.
9Custodian AgreementEnsure complying with custody requirements (Amana).
10Subscription Agreement/ ApplicationEnsure the adequacy of the Offer and Acceptance language, auto-effectiveness and process.
11Prospectus: Subscription and SaleGeneral Sharia Compliance.
12Agency/Service type AgreementsEnsure that the agency relationship is properly established, following the AAOIFI Agency Sharia Standard # 23.
13Cost UndertakingThis is a promise to predominantly cover excess costs incurred by the service agent while rendering the agreed services with due care. Costs covered beyond that are reported.
14Prospectus: General InformationGeneral Sharia Compliance.
15Prospectus: Form of Certificate (Registered or bearer)

Prospectus: Ratings

Prospectus: Credit worthiness of the Obligor

Prospectus: Risk factors

Prospectus: Taxation

Prospectus: Legal Matters

Prospectus: Other Sections of the Prospectus
General Sharia Compliance and equal rights of Sukukholders.


General Sharia Compliance.

General Sharia Compliance.


General Sharia Compliance.

General Sharia Compliance.

General Sharia Compliance.

General Sharia Compliance.

8. The Report. Once all is validated, the Sharia Reviewer finalizes his final Sharia Review Report (the Comprehensive Report) stating his analysis, assessment, Sharia violations/concerns and proposed remedies. In the Comprehensive Report, he will devise a section for each document and then for each clause of that document: (1) quote the clause, (2) its reference/number, (3) his interpretation of the clause, (4) the perceived Sharia violation/concern, (5) the Sharia remedy, preferably with the redrafted clause or line thereof (unless the remedy is omission) and (6) a comment on commercial or legal constraints or impact thereon for the consideration of the Sharia Board.

The Benefits

This Methodology has the following benefits:

  1. It serves as a guided methodical approach a beginner can easily follow in his first few Sukuk Sharia Reviews.
  2. It has different milestones to target and manage.
  3. The Supervisor (of the Sharia Reviewer) has better visibility of the Sukuk Sharia Review process. This is very important in the first few encounters, as it shows the Supervisor (a) where grooming is required and (b) how the Sharia Reviewer’s skills are progressing and developing.
  4. Reporting to seek remedies early in the Sharia Review process. This gives parties to the issuance, particularly the Obligor, major institutional investors and the lawyers/ law firms ample time to accommodate the Sharia requirements. Such comments may be a deal breaker from the point of view of the Sharia Reviewer’s Sharia Board, where in the last few hours parties are reluctant to accommodate any amendments.
  5. Ability to deal with different Sukuk issuances at the same time, prioritizing structure related review of these Sukuk issuances at hand ahead of documentation review, which shall prove vital when more than one Sukuk issuances are received together with an aggressive deadline for all of them.
  6. The Sharia Reviewer, having the clarity of the core Sharia structure of the underlying sukuk transaction and reviewing in that context, is more capable of determining Sharia concerns and offering potential remedies, with no compromise on legal defensibility and the commercial profile, facilitating an overall timely, favorable outcome.
  7. The Sharia Reviewer following this methodology for around three different issuances of Sukuk, strongly acquaints himself with the Sukuk Features and its Sharia Compliance requirements irrespective of the underlying Sukuk transaction, provided that he begins with understanding the Sukuk Features covered beforehand.
  8. The Sharia Reviewer, reviewing a few more Sukuk issuance down the line, will develop a targeted Sharia Review approach, targeting potential Sukuk Features concerns, revealing potential Sharia concerns faster than expected. This will be based on collective experience i.e. knowing where Sharia concerns may arise and how.
  9. The Supervisor can use this Methodology as a grooming tool to involve more employees in the Sharia Department or in a Sharia consultancy firm to conduct Sharia Review of Sukuk issuance and target enhancing their skills, talent and expertise at this front. This may be applied for interns as well.

Appendix 1

Methodical Sukuk Sharia Review Guideline 

SR: Conduct Sharia Review.

DSR: Degree of Sharia Review.

DM: Deliverable Milestone.

#StepAction
1Ensure availability of all the required documents.Intimate the concerned for missing documents.
2Know the parties and ownership structureConsolidate entities controlled by another entity or owned beyond 50%. Plot a diagram with consolidated entities, if any.
3Understand the core Sharia structureSR: Prospectus: (a) the Sharia Structure and (b) the Use of proceeds.
DSR: Moderate.
Sharia structure synchronizes well in mind.
4Review the overall structure for Sharia complianceSR: Prospectus: (a) the Overview of the Offering, (b) the Sharia Structure, (c) the Use of proceeds and (d) the Summary of the Transaction documents.
DSR: Thorough.
DM: Preliminary Report issued with Sharia concerns in relation to structure and summary transaction documents. The Preliminary Report preferably includes the outcomes of steps 5 and 6, if available.
5Assess suitability of the Underlying Asset(s)Assess suitability based on the Underlying Sukuk Transaction.
DM: Preliminary Report appended with Sharia concerns, if any, on Asset suitability. This is performed with Step 4, if possible.
6Assess Collateral ImpactAssess the effect of the guarantees and collateral arrangements on the overall Sharia structure.
DM: Preliminary Report appended with Sharia concerns, if any, on collateral arrangement. This is performed with Step 4, if possible.
7Documentation Sharia Review:
7.1Prospectus: Financials of Obligor; for Non-Halal activities.SR: for Non-Halal activities.
DSR: Skim through.
DM: In case of Sharia Repugnant business activity promptly escalate, append to in Preliminary Report and document in Comprehensive Report.
7.2Basic Underlying Transaction(s) documentsSR: for TC.
DSR: Thorough.
DM: Concluding comments on Basic Underlying Transaction(s) documents and documenting them in the Comprehensive Report.
7.3Sukuk Specific Underlying Transaction(s) documentsSR: for TC and GC.
DSR: Thorough.
DM: Concluding comments on Sukuk Specific Underlying Transaction(s) documents and documenting them in the Comprehensive Report.
7.4Prospectus: Terms of the CertificateSR: for TC and GC.
DSR: Thorough.
Append comments to the Comprehensive Report.
7.5Prospectus: Feasibility studySR: for TC and GC.
DSR: Skim through.
Append comments to the Comprehensive Report.
7.6Prospectus: SettlementSR: for GC, particularly, interest charges and/or FX Sharia violations.
DSR: Skim through.
Append comments to the Comprehensive Report.
7.7Trust DeedSR: for complying with trust/custody requirements (Amana). This may be executed unilaterally or incorporated as part of an agency agreement.
DSR: Thorough.
Append comments to the Comprehensive Report.
7.8Custodian AgreementSR: for complying with custody requirements (Amana).
DSR: Thorough.
Append comments to the Comprehensive Report.
7.9Subscription Agreement/ ApplicationSR: for adequacy of the Offer and Acceptance language, auto-effectiveness and process.
DSR: Thorough.
Append comments to the Comprehensive Report.
7.10Prospectus: Subscription and SaleSR: for GC.
DSR: Skim through.
Append comments to the Comprehensive Report.
7.11Agency/Service type AgreementsSR: for ensuring that the agency relationship is properly established, following the AAOIFI Agency Sharia Standard # 23.
DSR: Thorough.
Append comments to the Comprehensive Report.
7.12Cost UndertakingSR: to ensure that this promise is just to cover excess costs incurred by the service agent while rendering the agreed services with due care.
DSR: Thorough.
Comments on costs covered beyond that are appended to the Comprehensive Report.
7.13Prospectus: General InformationSR: for GC.
DSR: Skim through.
Append comments to the Comprehensive Report.
7.14 to 7.20Prospectus: Form of Certificate (Registered or bearer)


Prospectus: Ratings



Prospectus: Credit
worthiness of the Obligor


Prospectus: Risk factors



Prospectus: Taxation



Prospectus: Legal Matters



Prospectus: Other Sections of the Prospectus
SR: for GC and equal rights of Sukukholders.
DSR: Skim through.
Append comments to the Comprehensive Report.

SR: for GC.
DSR: Skim through.
Append comments to the Comprehensive Report.

SR: for GC.
DSR: Skim through.
Append comments to the Comprehensive Report.

SR: for GC.
DSR: Skim through.
Append comments to the Comprehensive Report.

SR: for GC.
DSR: Skim through.
Append comments to the Comprehensive Report.

SR: for GC.
DSR: Skim through.
Append comments to the Comprehensive Report.

SR: for GC.
DSR: Skim through.
Append comments to the Comprehensive Report.
8Finalizing the Comprehensive ReportFinalize Comprehensive Report, with a section for each document and for each clause of that document:
(1) quote the clause,
(2) its reference/number,
(3) the interpretation of the clause,
(4) the perceived Sharia violation/concern,
(5) the Sharia remedy, with the redrafted text, and
(6) a comment on commercial or legal constraints or impact thereon for the consideration of the Sharia Board.
DM: The final Comprehensive Report.

Expert Advice