As to what follows: The issuance of Sukuk on the basis of the rules of the Shining Shariah of Islam is among the objectives of Islamic banking, and is also one of the greatest means of establishing Islamic economies in society. This, however, is on condition that the tools used to develop and structure Sukuk are in consonance with the fundamental principles which distinguish Islamic economic systems from others. 

The interest-based system prevalent in the world today regularly issues bonds that yield interest from capital-intensive enterprises that bring great profits and regular revenues. Yet, the holders of such certificates are no more than lenders to the sponsors of such enterprises; and their earnings come from the interest on their loans in a percentage that accords with the price of interest in the marketplace. The profits of these enterprises after costs, including interest payments ⁽¹⁾, return exclusively to the sponsors. 

The basic concept behind issuing Islamic Sukuk, however, is for the holders of the Sukuk to share in the profits of large enterprises or in their revenues. If Sukuk are issued on this basis they will play a major role in the development of the Islamic banking business and thereby contribute significantly to the achievement of the noble objectives sought by the Shariah. Among the benefits of Sukuk are the following:

1. Sukuk are among the best ways of financing large enterprises that are beyond the ability of a single party to finance.
   
2. Sukuk provide an ideal means for investors seeking to deploy streams of capital and who require, at the same time, the ability to liquidate their positions with ease whenever the need should arise. This is because it is envisioned that a secondary market for the trading of Sukuk will develop. Thus, whenever investors require cash from their investments, or from a part of the same, it will be possible for them to sell their Sukuk holdings, or a part thereof, and receive their value from their original investment plus earnings, if the enterprise is profitable, in cash.
   
3. Sukuk represent an excellent way of managing liquidity for banks and Islamic financial institutions. When these are in need of disposing of excess liquidity they may purchase Sukuk; and when they are in need of liquidity, they may sell their Sukuk into the secondary market.
   
4. Sukuk are a means for the equitable distribution of wealth as they allow all investors to benefit from the true profits resulting from the enterprise in equal shares. In this way, wealth may circulate on a broad scale without remaining the exclusive domain of a handful of wealthy persons. ⁽²⁾ This is clearly among the most important of all the higher purposes sought by an Islamic economic system.

Today, there are many Sukuk in the market, all claiming to be Islamic Sukuk. In this brief study, I mean to shed light on the mechanisms they use and on the extent to which these comply with the precepts of Islamic jurisprudence, and its principles, and its higher purposes. The issuers of these Sukuk have expended a great deal of effort to make them competitive with the conventional bonds prevalent in today's capital markets. By endowing these Sukuk with the same characteristics of bonds, they have attempted to facilitate their acceptance in both Islamic and conventional markets.

The most prominent characteristics of conventional bonds may be summarized as follows:

1. Bonds do not represent ownership on the part of the bond holders in the commercial or industrial enterprises for which the bonds were issued. Rather, they document the interest-bearing debt owed to the holders of the bonds by the issuer, the owner of the enterprise.
   
2. Regular interest payments are made to the bond holders. The amount of interest is determined as a percentage of the capital and not as a percentage of actual profits. Sometimes the interest is fixed, while oftentimes in bonds with longer tenors the rate of interest is allowed to float.
   
3. Bonds guarantee the return of principal when redeemed at maturity, regardless of whether the enterprise was profitable or otherwise.
   The issuer of such bonds is not required to return more than the principal and the agreed amount of interest. Whatever profits may have been earned by the enterprise accrue entirely and exclusively to the issuer. So the bond holders have no right to seek a share in the profits beyond the interest.

These characteristics are not to be found in Islamic Sukuk, at least not directly. Even so, the issuers of Islamic Sukuk today have attempted to distinguish their Sukuk, however indirectly, with many of these same characteristics. For this reason they have developed a variety of mechanisms. Let us now study these mechanisms in the light of the following three points.

1. Bond Holders' Ownership of Enterprise Assets

The first point, or the bond owners' ownership of enterprise assets, is that the majority of Sukuk are clearly different in this respect from interest-based bonds. Generally, Sukuk represent ownership shares in assets that bring profits or revenues, like leased assets, or commercial or industrial enterprises, or investment vehicles that may include a number of projects. This is the one characteristic that distinguishes Sukuk from conventional bonds. However, quite recently, the market has witnessed a number of Sukuk in which there is doubt regarding their representation of ownership. For example, the assets in the Sukuk may be shares of companies that do not confer true ownership but which merely offer Sukuk holders a right to returns. Such Sukuk are no more than the purchase of returns from shares; and this is not lawful from a Shariah perspective. Likewise, there has been a proliferation of certain Sukuk that are based on a mix of ijarah, istisna' and murabahah contracts undertaken by Islamic banks or institutions such that these are packaged and sold to Sukuk holders who hope to obtain the returns from these operations. The inclusion of murabahah contracts into such Sukuk, however, cannot but bring into question the issue of the sale of debt, ⁽³⁾ even if the percentage of the murabahah contracts may be considerably less than that of the ijarah, musharakah and istisna' contracts. All of this requires careful review.

2. Regular Distributions to Sukuk Holders

In reference to the second point, most of the Sukuk that have been issued are identical to conventional bonds with regard to the distribution of profits from their enterprises at fixed percentages based on interest rates (LIBOR). In order to justify this practice, the issuers include a paragraph in the contract which states that if the actual profits from the enterprise exceed the percentage based on interest rates, then that amount of excess shall be paid in its entirety to the enterprise manager (whether a mudarib, or a partner, or an investment agent) as an incentive for the manager to manage effectively. I have even seen in the structure of certain Sukuk that they do not state that such excess will become the right of the manager as an incentive but, instead, they state no more than that the holders of the Sukuk will be entitled to a fixed percentage based upon the rate of interest at the time of regular distributions (as if the excess as an incentive was established by estimation or by exigency). If the actual profits are less than the prescribed percentage based on interest rates, then the manager may take it upon himself to pay out the difference (between the actual profits and the prescribed percentage) to the Sukuk holders, as an interest free loan to the Sukuk holders. Then, that loan will be recovered by the lending manager either from the amounts in excess of the interest rate during subsequent periods, or from lowering the cost of repurchasing assets at the time the Sukuk are redeemed as will be explained in detail in the third point, below, Allah willing.

3. Guaranteeing the Return of Principal

As to the third point, virtually all of the Sukuk issued today guarantee the return of principal to the Sukuk holders at maturity, in exactly the same way as conventional bonds. This is accomplished by means of a binding promise from either the issuer or the manager to repurchase the assets represented by the Sukuk at the stated price at which these were originally purchased by the Sukuk holders at the beginning of the process, regardless of their true or market value at maturity.

Then, by these complex mechanisms, Sukuk are able to take on the same characteristics as conventional, interest-bearing bonds since they do not return to investors more than a fixed percentage of the principal, based on interest rates, while guaranteeing the return of investors' principal at maturity.

We will now speak about these mechanisms firstly from the perspective of Islamic jurisprudence and secondly from the perspective of the higher purposes of Islamic finance and economics.

From the Shariah perspective, there are three questions:

First: Stipulating the amount in excess of the price of interest for the manager of the enterprise under the pretense that this is an incentive for good management.

Second: The manager's commitment, if the actual profits are less than the yield from the fixed rate of interest during any of the times for distribution, to lend the amount of the shortfall to the holders of the Sukuk. Thereafter the amounts of such loans will be recovered either through the actual profits of the enterprise at the times of following distributions or through the sale of the enterprise's assets at maturity.

Third: The binding promise by the manager that he will purchase the assets represented by the Sukuk at their face value, and not at their market value on the day they are redeemed.

One: Stipulating an Incentive for the Manager

With regard to the stipulation of an incentive for the manager of the enterprise, its justification may be found in what certain jurists have mentioned in regard to the lawfulness of offering incentives in contracts of wakalah or in brokerage. Al-Imam al-Bukhari mentioned the same on the authority of the Companion Ibn `Abbas and Ibn Sirin:

Said Ibn `Abbas:"There is no impediment to one's saying, 'Sell this cloth and whatever is in excess of this or that4 will be yours.'" Said Ibn Sirin: "When someone says, 'Sell it for this much and whatever profits are realized beyond that will be yours, or will be shared between us,' then there is no problem with that."

This opinion was adopted by the Hanbali school of jurisprudence. In Al-Kafi by Ibn Qudama it is written:

If someone says, "Sell this for ten, and whatever you receive in excess will be yours," then that excess will be lawful for the seller because Ibn `Abbas did not see any impediment to doing so.

This opinion is recorded by Ibn Abi Shaybah in his Al-Musannaf from Ibn `Abbas, Ibn Sirin, Shurayh, `Amir al-Sha`bi, al-Zuhri, and al-Hakam. `Abd al-Razzaq added Qatada and Ayyub to those who agreed. The arrangement, however, was considered makruh (undesirable) by Ibrahim al-Nakha`i and Hammad, as related by `Abd al-Razzaq, and by al-Hasan al-Basri and Tawus ibn Kaysan as related by Ibn Abi Shaybah.⁽⁶⁾ This is the opinion of the majority, other than the Hanbali scholars. Al-Hafidh Ibn Hajr commented on the opinion of Ibn `Abbas mentioned by al-Bukhari:

This, too, refers to the wages of a broker. But, as these are unknown ⁽⁷⁾, the majority of jurists have not allowed the arrangement, saying if the broker sells the item for the owner on this basis, he will be entitled to no more than the fee customarily awarded for similar sales. Some jurists have interpreted the statement by Ibn `Abbas to mean that he saw the situation as analogous to that of a partnership. The same interpretation was given by Ahmad ibn Hanbal and Ishaq. Ibn al-Tin recorded that some jurists stipulated, for its acceptance as lawful, that people at the time understand the price of the goods to equal more than what was stated; but his opinion was challenged on the grounds that ignorance of the actual amount of the fee still remains.⁽⁸⁾

Badr al-Din al-`Ayni wrote:

As to the opinion of Ibn `Abbas and Ibn Sirin, well, the majority of scholars do not allow such a sale. Among those who disliked it are Sufyan al-Thawri and the jurists from Kufa. Likewise, al-Shafi`i and Malik did not allow it. If someone sells on this basis he will be entitled to a fee equal to what is customary for such a sale. Ahmad and Ishaq, however, have allowed the sale, saying, "This is actually a partnership, for at times a partner will not profit." ⁽⁹⁾