Fitch - "Demystifying Corporate Sukuk"

The second Fitch report which was released recently, "Demystifying Corporate Sukuk" describes the underlying structure of sukuk.

One of the first things that I like about this article is that it provides a much more nuanced (and accurate, I think) description of riba and almost more importantly, the reasons for its prohibition. It seems to me that too many stories written about Islamic finance describe riba as 'interest' and gharar as 'risk' without explaining in more detail the nuances and the reasons for prohibition.

"Riba [...] is not necessarily about interest rates as such, but rather about unlawful, unequal gain [and[ the prohibition against riba is related to ethical norms and the establishment of a moral economy [...] The key concept to grasp when it comes to understanding the idea of the prohibition of riba, is that it is not acceptable for payment to be guaranteed regardless of the outcome for which the money was originally borrowed."

The rest of the report provides a brief description (and clear chart of a sukuk transaction) for ijara, mudaraba and musharaka sukuk.

As the earlier article describes, Fitch's views sukuk as asset-based securities equivalent in risk to senior unsecured obligations. One of the interesting and illuminating descriptions of Islamic finance and sukuk in particular describes how

"Fitch would tend to view Sukuk as similar to other 'ethical' bonds - such as those designed to comply with the needs and desires of environmental or other socially conscientious investors".

This is a good analogy since the few court cases by companies trying to eliminate their debt by claiming the sukuk were not Shari'ah-compliant have not had their claim supported by the courts. These cases are the first few and the degree to which Shari'ah-compliance is legally enforceable through the contract.