Sukuk - Bond or Equity A Profoundly Subversive Answer

Here's an extremely interesting and important article by Oliver Ali Agha, Managing Partner at Agha and Shamsi, and Claire Grainger, Partner of Head of Projects and Dispute Resolution at Agha and Shamsi.

Their central thesis is that Shari'ah compliant sukuks cannot be bonds or bond like instruments.   Shari'ah compliant sukuks are equity-like.  And so to refer to events of default or defaults is wrong.  Equity cannot default.  Therefore, sukuks can never default. 

These few simple statements embody a radically subversive thesis which demolishes the theoretical foundation of sukuk market as it currently exists by denying that there is an  Islamically acceptable from of traditional debt securities. 

This position is much more dangerous than law cases like BLOM v TID.  Posts on that topic here and here.  The latter represent attacks on implementation of aspects of the transaction while presupposing the structure is sound.  The former holds the structure itself is against the law (Shari'ah).  Under Agha and Grainger's thesis there is no "fix", no magic drafting that can achieve the goal of an "Islamic" debt instrument with bond-like features.

Some other observations.

1. Most of the sukuks I have seen do not meet AAOIFI's five tests. (outlined in the article)  Most fall down on the first. The Offering Memorandum are clear that the sukuk holders have no right in ownership of the underlying asset.  They do not own it during the transaction.  And  generally may not seize it if the obligor fails to perform.  Sukuk certificate holders have the right to the use or proceeds from the assets.  It seems to me that if I've leased you a piece of land which you've re-leased to me and I stop honoring the master lease contract, your recourse in a Shari'ah Court is not to take ownership of the land, but to sue me for the lost revenues. 
2. Sukuk are deliberately structured to be bond equivalents.   That is what the market appears to be demanding.  What Agha and Grainger are saying is that these instruments are not Shari'ah compliant.
3. From there it is not a giant leap to the conclusion that presenting these sukuk as Shari'ah compliant is fraud - on the part of the obligor, its financial advisors, and the Shari'ah boards.  The principle is crystal clear according to Agha and Grainger.
4. They make one other point which I don't follow.  "In reality, sukuk holders do have substantial remedies under Shari'ah: they are the beneficial owners of the underlying assets that would need to be excluded from the insolvency proceedings of the issuer."   Since the documentation I've seen explicitly states that the certificate holders do not own the assets, I 'm presuming they are referring to the hypothetical situation in which title transfer has taken place.
5. Without too great an intellectual leap, other debt like structures presented as Shari'ah compliant come under siege.