Sukuk mudarabah and sukuk musharakah in the light of accounting and auditing organization for Islamic institutions (AAIOFI) pronouncement 2008: challenges and opportunities

This article attempts to highlight some recent developments and issues in the sukuk market, especially in the light of the AAOIFI Shari`ah pronouncement of February 2008. In general, the market tends to understand and expect sukuk to be within the “fixed income” types of investment with minimal...

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Main Author:	Engku Ali, Engku Rabiah Adawiah
Format:	Article
Language:	English
Published:	Jabatan Kemajuan Islam Malaysia 2009
Subjects:	HJ Public Finance
Online Access:	http://irep.iium.edu.my/9831/ http://irep.iium.edu.my/9831/1/sukuk_mudarabah_and_sukuk_musharakah.pdf

id	iium-9831
recordtype	eprints
spelling	iium-98312013-07-17T09:30:14Z http://irep.iium.edu.my/9831/ Sukuk mudarabah and sukuk musharakah in the light of accounting and auditing organization for Islamic institutions (AAIOFI) pronouncement 2008: challenges and opportunities Engku Ali, Engku Rabiah Adawiah HJ Public Finance This article attempts to highlight some recent developments and issues in the sukuk market, especially in the light of the AAOIFI Shari`ah pronouncement of February 2008. In general, the market tends to understand and expect sukuk to be within the “fixed income” types of investment with minimal or controlled risks and capital preservation features. In short, they expect sukuk to behave like conventional bonds in terms of capital preservation, periodic distribution frequency and rate of return. When sukuk use debt-based structures and lease-based structures, it is not that difficult to meet this fixed income characterisation. However, when sukuk start to use equity contracts like mudarabah and musharakah, such fixed income characteristic created some anomalous situations and conflicts. There are apparently inherent contradictions in the nature of mudarabah and musharakah as equity contracts, and capital preservation and fixed income nature of debt market environment in which sukuk are expected to operate. Thus, additional “credit enhancements” and strategieswere introduced to the mudarabah and musharakah sukuk structures to achieve capital protection and predictable periodic returns similar with other fixed income or bonds instruments. These credit enhancements to equity-based sukuk had been the subject of strong criticisms by various parties in terms of their compliance with the Shari`ah requirements of mudarabah and musharakah contracts. This had led to the practices being reviewed by the Shari`ah Board of AAOIFI. They finally came up with the February 2008 AAOIFI pronouncement that highlighted in unequivocal terms that sukuk are inherently different from conventional bonds and fixed income instruments, and thus, should behave differently. It was also understood from the pronouncement that when the sukuk structure is equity-based, certain basic rules of equity cannot be compromised for the sake of meeting the commercial demand of the market, which actually is conditioned by the prevalent interest-based economy and philosophy. The AAOIFI pronouncement gave rise to a re-examination of market perception of sukuk. Sukuk should not and could no longer be perceived as strictly fixed income instruments with capital preservation features. If the pronouncement is stringently adhered to, the equity-based sukuk should behave like equity instruments and not to be tweaked to fit into the “fixed income box” Jabatan Kemajuan Islam Malaysia 2009 Article PeerReviewed application/pdf en http://irep.iium.edu.my/9831/1/sukuk_mudarabah_and_sukuk_musharakah.pdf Engku Ali, Engku Rabiah Adawiah (2009) Sukuk mudarabah and sukuk musharakah in the light of accounting and auditing organization for Islamic institutions (AAIOFI) pronouncement 2008: challenges and opportunities. Jurnal Muamalat, 2. pp. 17-37. ISSN 1985-6156
repository_type	Digital Repository
institution_category	Local University
institution	International Islamic University Malaysia
building	IIUM Repository
collection	Online Access
language	English
topic	HJ Public Finance
spellingShingle	HJ Public Finance Engku Ali, Engku Rabiah Adawiah Sukuk mudarabah and sukuk musharakah in the light of accounting and auditing organization for Islamic institutions (AAIOFI) pronouncement 2008: challenges and opportunities
description	This article attempts to highlight some recent developments and issues in the sukuk market, especially in the light of the AAOIFI Shari`ah pronouncement of February 2008. In general, the market tends to understand and expect sukuk to be within the “fixed income” types of investment with minimal or controlled risks and capital preservation features. In short, they expect sukuk to behave like conventional bonds in terms of capital preservation, periodic distribution frequency and rate of return. When sukuk use debt-based structures and lease-based structures, it is not that difficult to meet this fixed income characterisation. However, when sukuk start to use equity contracts like mudarabah and musharakah, such fixed income characteristic created some anomalous situations and conflicts. There are apparently inherent contradictions in the nature of mudarabah and musharakah as equity contracts, and capital preservation and fixed income nature of debt market environment in which sukuk are expected to operate. Thus, additional “credit enhancements” and strategieswere introduced to the mudarabah and musharakah sukuk structures to achieve capital protection and predictable periodic returns similar with other fixed income or bonds instruments. These credit enhancements to equity-based sukuk had been the subject of strong criticisms by various parties in terms of their compliance with the Shari`ah requirements of mudarabah and musharakah contracts. This had led to the practices being reviewed by the Shari`ah Board of AAOIFI. They finally came up with the February 2008 AAOIFI pronouncement that highlighted in unequivocal terms that sukuk are inherently different from conventional bonds and fixed income instruments, and thus, should behave differently. It was also understood from the pronouncement that when the sukuk structure is equity-based, certain basic rules of equity cannot be compromised for the sake of meeting the commercial demand of the market, which actually is conditioned by the prevalent interest-based economy and philosophy. The AAOIFI pronouncement gave rise to a re-examination of market perception of sukuk. Sukuk should not and could no longer be perceived as strictly fixed income instruments with capital preservation features. If the pronouncement is stringently adhered to, the equity-based sukuk should behave like equity instruments and not to be tweaked to fit into the “fixed income box”
format	Article
author	Engku Ali, Engku Rabiah Adawiah
author_facet	Engku Ali, Engku Rabiah Adawiah
author_sort	Engku Ali, Engku Rabiah Adawiah
title	Sukuk mudarabah and sukuk musharakah in the light of accounting and auditing organization for Islamic institutions (AAIOFI) pronouncement 2008: challenges and opportunities
title_short	Sukuk mudarabah and sukuk musharakah in the light of accounting and auditing organization for Islamic institutions (AAIOFI) pronouncement 2008: challenges and opportunities
title_full	Sukuk mudarabah and sukuk musharakah in the light of accounting and auditing organization for Islamic institutions (AAIOFI) pronouncement 2008: challenges and opportunities
title_fullStr	Sukuk mudarabah and sukuk musharakah in the light of accounting and auditing organization for Islamic institutions (AAIOFI) pronouncement 2008: challenges and opportunities
title_full_unstemmed	Sukuk mudarabah and sukuk musharakah in the light of accounting and auditing organization for Islamic institutions (AAIOFI) pronouncement 2008: challenges and opportunities
title_sort	sukuk mudarabah and sukuk musharakah in the light of accounting and auditing organization for islamic institutions (aaiofi) pronouncement 2008: challenges and opportunities
publisher	Jabatan Kemajuan Islam Malaysia
publishDate	2009
url	http://irep.iium.edu.my/9831/ http://irep.iium.edu.my/9831/1/sukuk_mudarabah_and_sukuk_musharakah.pdf
first_indexed	2023-09-18T20:19:27Z
last_indexed	2023-09-18T20:19:27Z
_version_	1777408008149532672

Sukuk mudarabah and sukuk musharakah in the light of accounting and auditing organization for Islamic institutions (AAIOFI) pronouncement 2008: challenges and opportunities

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