WHY DOES CATEGORISATION OF ØUKÕK STRUCTURES MATTER?

Abstract

The Islamic finance market has developed and expanded with the increased global demand for ethical investment products and the introduction of a variety of financial instruments. Within the Islamic finance market, ÎukËk has proven to be an important financial instrument. In the literature ÎukËk has been categorised into four major types: asset-backed, asset-based, debt-based and project based. There is a need to understand the differences between these categories in order to ensure their SharÊÑah-compliance. The research question dealt with in this paper is: Why does the categorisation of ÎukËk structures matter and what are the differences between the various categories of ÎukËk? This paper describes such differences through an analytical case study of the General Electric Capital Sukuk Ltd. (GE Capital Sukuk) which issued ÎukËk in November 2009. The AAOIFI Resolution (2008) is taken as the starting point of discussion on the mechanisms used in practice in ÎukËk structures. By pointing out the differences between asset-based and project-based ÎukËk and by defining the structural features of the GE Capital Sukuk, this paper illustrates that depending on the category in which ÎukËk is categorised, Islamic finance practitioners may have to consider different structural and legal mechanisms when issuing ÎukËk. By categorising ÎukËk, the industry is not merely giving the structures a name. Rather, the ÎukËk categories carry background information on the structures; the distinctions also clarify what legal and structural features are permissible for each structure.