The way sukuk are structured involves setting up an external company to separate the assets of the sukuk from the company's assets and other business. Are some sukuk structured that way to issue sukuk to finance businesses that would not be halal investments in the underlying company?
The recent International Finance Corporation sukuk is an unremarkable sukuk apart from the identity of its issuer, but as I read through the prospectus, the use of an SPV as the issuer led me to consider whether the structure used by many sukuk could be a way for non-Shari'ah-compliant companies to raise funds using sukuk based on Shari'ah-compliant assets without investors necessarily knowing whether the proceeds would be used for a Shari'ah-compliant purpose.
The IFC sukuk was issued by a Cayman Islands-domiciled SPV, the Hilal Sukuk Company, and is similar to sukuk issued by the Islamic Development Bank. The SPV issues sukuk and then uses the proceeds to buy ijara contracts from the IFC, which acts as manager and collects the lease payments and distributes them to the holders of the sukuk.
The payments are smoothed over the maturity using a reserve account that accumulates excess profits and uses it to cover any shortfalls. Any balance in the reserve account at maturity is paid to the IFC as an incentive fee. At maturity (or in the case of default), the SPV has the right only to sell the assets back to the IFC at a pre-determined exercise price. Any shortfalls not covered by the reserve account are advanced by the IFC and then repaid from future lease payments or the sale of the assets at maturity, but beyond that, there is no recourse to other assets of the IFC (it is an unsecured debt).
However, the issue that arose in my mind was that the IFC is generally a conventional financial institution that issues debt to finance its lending (with interest). As such, were the IFC itself being considered as an investment by investors concerned about Shari'ah-compliance, it would probably not be judged to be a halal investment. However, it is able to issue sukuk because a portion of its lending is done in a Shari'ah-compliant manner through ijara (the assets for the IFC sukuk are ijara financing of medical equipment).
The way the sukuk prospectus describes it, the investors are buying investments from the SPV and those monies will be used solely for buying Shari'ah-compliant ijara assets from the IFC. The structure ensures that the relevant scope of Shari'ah review is on the structure of the sukuk certificates, the assets being used and the mechanism for lease payments to flow to sukuk certificateholders. There is not explicit mention in the prospectus to what the IFC will use the proceeds of the sukuk for.
They may use it to extend more financing using Shari'ah-compliant ijara contracts (or murabaha or other contracts). However, because money is fungible, it is impossible to tell whether the funds will be used eventually to support interest-bearing loans that make up a bulk of the IFCs assets. While the transaction itself is Shari'ah-compliant according to the scholars who reviewed it, it is not clear whether the use of the proceeds will be in halal areas.
Without the disclosure, there is a gap in some sukuk structures about whether they follow the spirit of the law and not just the letter. Could, for example, a large conventional bank that also offers a few Shari'ah-compliant mortgages use those assets to issue a sukuk to fund the rest of its balance sheet? At what point would the underlying issuer's business be raised with respects to the Shari'ah-compliance of the sukuk it issues. At this point it is not clear, but it is an important thing to consider as a growing number of issuers look to Islamic finance as a way to raise financing.