Islamic Finance: Using blockchain to solve wakaf challenges

Wakaf — the Arabic word for an endowment to a charitable cause — contributed significantly to the global socioeconomic landscape in the past, especially in eradicating poverty. However, in modern times, wakaf has not had a compelling impact on improving the welfare of the people, according to Dr Farrukh Habib, researcher at International Shari’ah Research Academy for Islamic Finance.

While there are many reasons for this, it is mainly due to the mismanagement of wakaf assets, he says. Although these assets are estimated to be worth more than US$1 trillion globally, it has been difficult for individuals and institutions to maximise the value of the endowments.

read more


Green Financing : Sukuk going Green

The issuance of world’s first Green SRI sukuk by Malaysia not only serves as a testament for its leadership in sukuk market but also exemplifies the country’s commitment towards green and sustainable responsible investments. Malaysia’s experience in facilitating the green sukuk issuance by developing the necessary framework and infrastructure for a conducive market of green sukuk is set to become a model in bridging Islamic finance and SRI industry. more

FinTech Islamic Finance Challenge

What is the FinTech Islamic Finance Challenge?

FinTech Islamic Finance Challenge is an opportunity to transform your technology-based idea into a social impact finance project. We are here to listen to creative and innovative minds looking for solutions to improve the access to Islamic financial services through technology and to those who are determined to contribute to a socially responsible development according to the Islamic finance principles.

Further detail

Goldman Sachs First & Second Sukuk Issues

Done by: RAZAN ALTWAIRQI, Zainab Bin Mafouz, and Noha Dhaba’an

Goldman Sachs The firm

Goldman Sachs is an American multinational firm founded in 1869 in New York, while Saudi Arabia Goldman Sachs were authorized in January 2009. The firm offers a wide range of financial services primarily in investment banking services, lending, securities, financial management and financial engineering. It deals basically with institutional clients beside the high-net worth individuals, and provides a variety of financial specialized services that can be classified into four major categories:

 1- Investment banking as strategic advising, risk management, IPOs and underwriting for other securities.

 2- Institutional client services as facilitating the client’s transactions and making markets in financial and commodity products.

3- Investing and lending services as originating loans to finance the clients and investing through financial assets and real estate entities.

4- Investment management services as financial counselling, portfolio management, wealth advisory and transaction services.

The first Sukuk issue:

In 2011 Goldman Sachs intended to inter the Islamic capital market by issuing a 2 billion U.S.D worth sharia compliant Sukuk. This issue has caused a large debate in the Islamic region due to many reasons. Firstly, the Islamic community had a great doubt in the intention and the goals behind this issuance. As per the idea that says, Muslims are willing to accept lower returns on their investments in comparison to their conventional counter party just for the sake of a sharia compliant product that they understand its cost and liabilities.

 In addition, they are willing to share risk with the issuer of the Sukuk as part of the main profit loss sharing Islamic principle. The second reason the Islamic society was hesitant about this issuance is the accusations to the western financial sector of causing the financial crisis by applying the easy money product that contradicts the Islamic principles, so what do they have to offer to the Islamic conservative capital market. The third and most important reason is that the society was skeptical on what sharia knowledge does Goldman Sachs has to create an Islamic compliant product. (Global Islamic Finance Report “GIFR”2012).

On the other hand, voices in the Islamic capital market supported this issuance as they expected it to boost the market and enhance the current creditability of the market. Moreover, it will open new financing channels by the cooperation between the advanced western capital market and the Islamic markets.

In spite of these two contradicting opinions of the Goldman Sachs issue, the logic would be to inspect the compliant of the Sukuk structure offered. As per the rulings of Islam, everything is permissible unless it violates a sharia rule. Western companies are offering many different products to the Islamic world, and Muslims have been trading with non-Muslim countries for ages. Then the core of this issue is to investigate the compliance of the Sukuk despite its source and take a decision that considers the best interest of the society.

The first Sukuk structure:   

Goldman Sachs announced that it was going to the market to rise financing totaling $2 billion through a Murabaha agreement; they set up a special purpose vehicle (SPV) called “Global Sukuk Company Limited” as a trustee. The Trustee was incorporated under the laws of the Cayman Islands on 6 September 2011 as an exempted company with limited liability. The Trustee is a newly formed entity and has no operating history, there only asset will be the Trust Assets held for credit holders (from Goldman Sachs’ base prospectus). The base prospectus submitted to various stock exchanges including the London Stock Exchange and the Irish Stock Exchange. The SPV in its capacity as issuer and trustee has established a program for the issuance of Murabaha trust certificates in a maximum aggregate face amount of $2,000,000,000 as may be increased in accordance with the terms of the Master Declaration of Trust (MUSHTAK, 2012).

Below are the terms and conditions of Trust Certificate Issuance Program taken from GLOBAL SUKUK COMPANY LIMITED’s base prospectus.

Trustee: Global Sukuk Company Limited, as trustee for and on behalf of the Certificate-holders and, in such capacity, as issuer of the Certificates.

Ownership of the Trustee: The authorized share capital of the Trustee is U.S.$50,000 consisting of 50,000 ordinary shares of U.S.$1.00 each, of which 250 have been fully paid up and issued.

Arranger: Goldman Sachs International

Guarantor: The Goldman Sachs Group, Inc.

Guarantee: GSG (as the Guarantor) will agree to unconditionally and irrevocably guarantee to the Trustee the prompt and complete payment when and to the extent due, whether by acceleration or otherwise, of all payment obligations, of GSI arising out of or under the Master Murabaha Agreement.

Initial Program Amount: Up to U.S. $2,000,000,000 (or its equivalent in other currencies) aggregate face amount of Certificates outstanding at any one time.

Issuance in Series: The Certificates will be issued in series .The specific terms of each Series will be completed in the applicable Final Terms. Certificates may be distributed by way of private or public placement and in each case on a syndicated or non-syndicated basis.

Currencies: Certificates may be denominated in Dirhams, U.S. Dollars, Saudi Riyals and Singapore Dollars or any other currency or currencies, subject to compliance with all applicable legal and/or regulatory and/or central bank requirements.

Maturities: The Certificates will have such maturities as may be agreed between the Trustee and the relevant Dealer.

Issue Price: Certificates may be issued at any price on a fully paid basis.

Status of the Certificates: Each Certificate will represent an undivided ownership interest in the Trust Assets of the relevant Series.

Dissolution Amount: In relation to a particular Series, the sum of (i) the aggregate face amount of the Certificates of the Series and (ii) the profit amount due on the maturity of such Series, which shall in aggregate, be equal to the Deferred Payment Price in respect of the Murabaha Contract for such Series.

According to Wouters (2011) he indicated that the above chart represents Murabaha Arrangements used by Goldman Sachs in their first Sukuk issuance:

1. The Trustee (as the Seller) will, at the request of the Purchaser, enter into a Murabaha Contract with the Purchaser whereby the Seller will use the proceeds from the issuance of the Series to purchase certain commodities from a third party supplier on immediate delivery and immediate payment terms.

2. The client (GSI) will act as the buying agent of the trustee in this acquisition transaction from the supplier.

3. Then the trustee will sell the commodities to the GSI (as a purchaser) on immediate delivery but with deferred payment basis (cost + the markup).

The certificate holder will receive their periodic distribution amount as it comes due.

Sharia Issues:

In 2011, GSI declaration of $2 billion Sukuk issuance was marred with controversy, and consequently, was faced by a storm of disapproval to the extent that is was never issued. Before going through the main issues in GSI first proposed Sukuk issue, it is worth noting that the idea of a conventional bank issuing Islamic bonds is by itself widely controversial. According to (CHAPTER 10: Goldman Sachs Milestone Global Sukuk, 2012); while some Muslim investors are willing to sacrifice high return for being in compliance with Sharia principles, and consequently, will refrain from investing in any financial products issued by conventional financial institutions, others deem the participation of conventional banks in Sukuk issuance as a step that might contribute to the development of Islamic markets. In general, scholars and Islamic finance practitioners had specified three main problems in GSI 2011 Sukuk issue related to its structure, listing on an exchange, and the use of its proceeds.

The Structure

Regarding the issue of GSI’s 2011 Sukuk structure, it was stated in the prospectus that it was Murabaha based Sukuk as the contract between the SPV (Global Sukuk Company as a trustee and seller) and GSI was Murabaha. However, Mohammed Khnifer, a renowned Islamic banking practitioner, Sukuk structurer, and strategist, argued that GSI’s 2011 Sukuk issue structure can possibly be deemed as reverse Tawarruq as the Sukuk proceeds’ cycle was not entirely revealed prospectus (2011). Accordingly, a verification of such a claim is essential.

Murabaha Sukuk, as defined by AAOIFI, are certificates of equal value issued to provide financing for the acquisition of goods through a Murabaha-based sale contract where the certificate-holders are the owners of the commodity. Figure (2) illustrates the structure of Plain Vanilla Murabaha Facility as proposed by GSI Sukuk base prospectus in which the following statement was repeatedly stipulated

“…whereby the Trustee will, at the request of GSI, use the proceeds of the issuance of the Series to purchase certain commodities from a third party Seller on immediate delivery and immediate payment terms and will immediately sell such commodities to the GSI on immediate delivery terms but with payment on a deferred basis.” (Global Sukuk Company Limited, 2011, p. i)

Moreover, Mr. Asim Khan, MD and head of structuring for Dar Al Istithmar (the Sharia advisor for Global Sukuk issue), stated that the documents “clearly shows that Trustee, as seller, sells the commodity to GSI, as purchaser. That’s it…” (Khan, 2011)

However, despite the apparent conformity to Sharia, the structure requires a second leg to attain cash flows to make Sukuk of value, a thing that originated the debate regarding the existence of Tawarruq transaction. Apparently, a simple review of the legal documentation is insufficient to provide a clear evidence regarding the implicit existence of reverse Tawarruq. Therefore, looking at the intentions of the parties involved might provide an insight on this issue. In essence, GSI is likely to sell the commodities immediately in order to get cash. This constitutes a situation of gaining money against deferred payments with a markup. Thus, for sure there will be a pre-intended second leg associated with the proposed Murabaha facility as it was stated in the base prospectus

Upon completion of the sale of the Commodities by the Trustee (in its capacity as Seller) to the GSI, the latter may hold the Commodities as inventory or elect to sell the Commodities in the open market provided that where GSI elects to sell the Commodities, it shall sell the Commodities to a third party buyer that is not the initial Seller.” (Global Sukuk Company Limited, 2011, p. 16)

Additionally, and to ensure the full compliance with Sharia, Dar Al Istithmar declared in the base prospectus that once the commodities are sold to GSI, it will have full discretion regarding the utilization of commodities (Khan, 2011). This seems like a confirmation that the structure of GSI 2011 Sukuk is far from being tainted with the non-complaint features of Organized Tawarruq.

Tawarruq, in its essence, is generally deemed acceptable from a Sharia point of view as it is considered a cash generating facility as funds will be firstly converted to commodities with deferred payment, and then back to cash. Yet, the organized version of Tawarruq, where the Islamic financial institution (IFI) will organize the process by acting as an agent that will sell the commodity on behalf of the client, had been categorized as unlawful by the Organization of Islamic Countries (OIC) Fiqh Academy (2009). Traditionally, the IFI used to provide assistance to the client by offering to organize the Tawarruq process, as the client usually has no expertise in regards to the sale of the commodities. This is a situation in which the client only has to sign some papers in order to end up with cash at the cost of deferred payments. Accordingly, one can conclude that since the Trustee (SPV/IFI) is not playing the role of an agent of GSI (in its client capacity), this will render the structure far from being classified as Organized Tawarruq. Yet, further scrutiny in regards to GSI Sukuk structure will reveal the true classification of this Sukuk structure.

In (Khnifer, 2011), the author argued that the structure of GSI 2011 Sukuk, illustrated in Figure (4), suggested that except for the legal issues (signing of papers and transfer of legal title), the Trustee (SPV) has no role in the first purchase transaction. Instead, GSI acted as an agent for the Trustee in this transaction, thus, was actually organizing the two legged structure by itself with full control over the process and the behavior of the Trustee. It is true that GSI, with its well situated global presence, is utterly capable to solely run the two legs of the structure, yet, this situation is deemed in clear contradiction to Sharia principles. This is because the purpose for which the SPV presence was required (to protect the rights and to work for the interest of the certificates-holders) was not fulfilled. The fact that the role of the Trustee in GSI Sukuk structure was clearly marginalized has rendered the structure not in full compliance with Sharia. This explains why most of the Islamic scholars, especially those who were mentioned in the base prospectus as members of the Advisory board of Dar Al Istithmar, refrained from approving this Sukuk issue (Davies, 2012).

Listing on the Irish Stock Exchange

Mr. Mohammed Khnifer and other Islamic financial practitioners had further concerns regarding GSI 2011 Sukuk listing on the Irish Stock Exchange (ISE). It was clearly stated in (Khan, 2011) that

…the offering circular clearly states in several places that the certificates can only be traded on a spot basis and at par value if they are to be Sharia compliant … hence the listing can, practically speaking, only have a taxation and regulatory benefit without impinging on Sharia principle in any manner.

Although this statement might seemingly provide reassurance regarding the Sukuk trading on ISE, neither it nor the base prospectus provided a clarification regarding the procedures by which the implied non-tradability feature of Murabaha Sukuk can be ensured. Khnifer (2011) asserted that the ability of ISE to ensure that GSI Sukuk will be traded at par is questionable. More importantly, he stated that, practically, listed securities are intended to be traded and this is always associated with fluctuations in the yield. Thus, a situation of debt trading will be created, a thing that will render the process of Sukuk issuance impermissible due to the prohibition of debt sale under Sharia.

In fact, any leniency in regards to such a case might open the door for possible disguised interest bearing transaction to be dominant, a thing that will surely compromised the credibility of Islamic finance as a whole. This is because as time passes, and with enough clemency, modifications to what are supposedly non-tradable Sukuk would be applied just to create more demand by attracting more investors regardless of their sentiments. In other words, the mere intention to promote Murabaha Sukuk, by listing them on a stock exchange for instance, just to make them more appealing to non-compliant investors is hazardous as it jeopardizes the authenticity of this type of Islamic investments as it cannot be distinguished from conventional bonds any more. Ideally, non-compliant investors must accept the principles of Islamic finance if they want to invest their wealth using any facilities categorized under this concept. Hence, issuers as well as investors involved in Islamic oriented investments must abide by the rules and principles of Islamic finance while the “vice versa” situation cannot be applied.

 The use of the Sukuk Proceeds

According to Khnifer (2011), there are strong indications that GSI will eventually use the proceeds of the Sukuk to fund its conventional activities, a thing that was clearly classified as impermissible by AAOIFI. Referring to Khan (2011), who was quoted previously in this paper, he asserted that proceeds would be only used for GSI “general corporate purposes and to meet its financing needs.” Assuming that GSI will do this with good faith, still, the alternatives available for this conventional, creative financial engineering practitioner to use funds in Sharia compliant investments are outnumbered by the proliferated non-Islamic investment activities. The fact that GSI lack an Islamic window/unit raises more concerns regarding the true availability of Sharia compliant ventures in which Sukuk proceeds can be utilized. Furthermore, according to Wouters (2012), none of the following was found in the base prospectus:

1)    A written commitment from GSI to utilized the proceeds in full compliance to Sharia principles;

2)    A guarantee by GSI in regards to provide full isolation to the proceeds from the institution’s interest-contaminated funds;

3)    An assurance by the Sharia Board regarding the existence of continuous monitoring, reporting, isolating, and cleansing of the funds.

In general, people with conservative perspectives oppose the participation of conventional banks in Sukuk issuance due to the possibility of the use of the proceeds in financing non-Sharia compliant activities. According to (Davies, 2012), Badlisyah Abdul Ghani, the chief executive of the Islamic unit of CIMB group in Malaysia, stated that except for development banks, conventional banks should be banned from issuing Sukuk. This is because Islamic finance, in essence, involves providing funds for Sharia-compliant activities, a thing that is not applicable to the interest-based nature of the conventional banks activities.

As we have seen the Goldman Sachs has offered a controversial structure in its Sukuk, this Sukuk remained as a plan and was not issued in real. However, Goldman Sachs has planned a second Sukuk issuance in 2014.

The second Sukuk issuance:

In 2014 Goldman Sachs issued their five-year second Sukuk of 500 million U.S.D. In this Sukuk issuance results turned around after the first issue failure, after the roadshows in Qatar and UAE the majority of the Sukuk were bought by Middle Eastern banks as the represented 87% of the investors while European investors represented 11% and Asian investors by 2% according to Gulf Business. These were significant results as the second issue of a conventional bank in a Muslim country especially after the controversial first Sukuk were Goldman Sachs has to cancel the issuance due to sharia incompliance.



The information about this issuance as per the base Goldman Sachs prospectus:

Face amount: 500,000,000 U.S.D

Issue price: 100%

Profit rate: 2.844%

Maturity date: 23 September 2019

Expected rating (S&P/Fitch): A- / A

Lead Manager(s): Goldman Sachs International, Abu Dhabi Islamic Bank, Emirates NBD Capital, National Bank of Abu Dhabi, NCB Capital & QInvest.

Trustee: JANY Sukuk Company limited

Arranger: Goldman Sachs

Guarantor: The Goldman Sachs Group, Inc.

The primer asset: crude oil assets via Wakalah agreement invested in a portfolio as follows:

51% sharia compliant commodities.

49% deferred payment Murabaha.

Dissolution Amount: As per the event of dissolution, the company is obligated to find a third party purchaser to purchase for a price equal to the then market value of the commodities.

By this Sukuk Goldman Sachs managed to inter the Islamic capital market after three years of its first attempt. Muslim investors represented mainly by Islamic financial institutions as banks bought the Sukuk Al-Wakala and were the majority of investors who invested in this Sukuk.  Goldman Sachs could inter the Islamic capital market this time by changing the structure of its Sukuk and due to changes in circumstances in the Middle East.

 The second Sukuk structure:

This is Goldman’s second attempt to issue Sukuk, after a $2 billion plan to issue a one-year Sukuk in 2011 was withdrawn amid charges that it failed to uphold Sariah principles. Goldman plans to use a new hybrid structure and has named four prominent Arab Gulf banks to manage the proposed $500 million, five-year issue: Abu Dhabi Islamic Bank, Emirates NBD Capital, National Bank of Abu Dhabi, and Saudi Arabia’s NCB Capital. The Sukuk will be listed on the Luxembourg Stock Exchange (Gordon, 2014).

Gordon stated in Global Finance magazine in October 2014 that Goldman investment vehicle JANY Sukuk will act as the Trustee and enter into a Murabaha (cost-plus sale agreement) for 49% of the issue and into a Wakala agreement for 51% with Goldman subsidiary J. Aron. Under a Wakala, where one party manages assets on behalf of another.

Figure 5 GSI Second Sukuk Issue Structure

Fitch Ratings, which said it expected to issue an A rating to the Sukuk program, noted that Goldman will unconditionally and irrevocably guarantee the payments of J. Aron under the Murabaha contract. The underlying assets are linked to commodities and crude oil (Bernardo, 2014).

Below are further details of the Sukuk terms and conditions taken from the Goldman Sachs’ Base prospectus. However, the structure diagram was taken from the general hybrid Wakala-Murabaha structure concept.

1, 2.The Goldman investment vehicle JANY Sukuk (SPV) will receive the proceeds from certificate issuance.

3. Then SPV will enter a 49% of Murabaha cost plus in Sharia commodities and 51% Wakala agreement with J. Aron (Wakeel).

4, 5. The Wakeel will purchase the assets from a third party (seller) and invest in the Wakala assets profile.

6, 7. The return on investment will be transferred to the SPV by the wakeel in order to be distributed to the investors.

8. Investors will receive the periodic amount distribution as well as the dissolution amount at maturity.

9. At the maturity the GSI will buy the assets as the purchaser and pay the exercise price.

Resolving the Previous Sharia Issues:

Apparently, GSI had learned the lesson and was able to resolve most of the Sharia issues related to the first Sukuk issue. Firstly, GSI opted to issue the second Sukuk using Wakala facility, in which one party manages assets on behalf of another, which became the preferred structure for Sukuk by multinational banks such as Societe Generale, HSBC, and Bank of Tokyo-Mitsubishi UFJ (Narayanan & Hamzah, 2014). Wakala is a basic structure and less complicated than other structures opted for in similar deals such as Murabaha; thus posing fewer challenges as to its conformity and compliance with Islamic Sharia principles, especially when it is structured and promoted by a conventional bank.

Moreover, it was clearly specified that the proceeds of the Sukuk would be used to fund the commodities business of J. Aron & Co. (Goldman Unit). This is deemed as an assurance by GSI that the Sukuk proceeds will be used to finance Sharia complaint activities (Narayanan & Hamzah, 2014).

More importantly, this time around GSI made sure it had on board key players in the GCC, including Abu Dhabi Islamic Bank (ADIB), Emirates NBD, National Bank of Abu Dhabi, QInvest and NCB Capital as arrangers, as well as itself (Narayanan & Hamzah, 2014). This has been done to engage institutions with more expertise in Sukuk issuance field to provide simultaneous facilitation and guidance regarding the requirements of Sharia compliant investors, especially those high net worth ones in GCC region.

Furthermore, the issue had been listed on the Luxembourg Stock Exchange as the trading of Wakala Sukuk is less controversial than trading Murabaha-based Sukuk (Kerr & Braithwaite, 2014). This is due to the absence of the indebtedness in the former type of Sukuk which rendered the trading of latter type impermissible. Yet, Mr. Mohammed Khnifer still emphasized on GSI expected efforts regarding ensuring the isolation of the Sukuk proceeds from financing its conventional activities (Kerr & Braithwaite, 2014).

Additionally, the involvement of multinational financial institutions with their profound financial expertise and investor base would, in a way or another, positively contribute to development of Islamic finance. However, this is contingent to these financial wholesalers level of disclosure regarding the characteristics of the underlying assets/projects and to the extent to which they abide by Sharia principles.


(2009). OIC Fiqh Academy Ruled Organised Tawarruq Impermissible. Organization of Islamic Contries.

CHAPTER 10: Goldman Sachs Milestone Global Sukuk. (2012). EDBIZ-NASDAQ OMX Sharia Indexes. NASDAQ OMX. (pp. 99-104).

Davies, A. (2012, April 24). Islamic Finance: Islamic Sukuk By Goldman Sachs Causes Debate. Retrieved from Huff Post Religion:

Goldman Sachs. (2015). Retrieved November 23, 2015, from

Kerr. S. & Braithwaite. T. (September 4, 2014). Goldman Sachs to issue its first Islamic bond. Financial Times, Retrieved from

Khan, A. (2011, December 8). Controversy dogs GS Sukuk. (T. I. Globe, Interviewer)

Khnifer. M. (2012). Disclosure of 3 Flaws in Goldman Sachs’ $2 Billion Islamic Bonds. Retrieved from http:// Disclosure_of_3_Flaws_ in_Goldman_Sachs_2_Billion_Islamic_Bonds.

Khnifer, M. (2011). Goldman Sachs Claims that its $2 billion Sukuk Program Follows a Murabaha Structure, Mohammed Khnifer Claims Otherwise–That it’s Nothing More than A reverse Tawarruq. (December 6, 2011).

Limited, G. S. (2011, October). Trust Certificate Issuance Programme. Goldman Sachs Base prospectus. Goldman Sachs.

Narayanan. A. (Sep 16, 2014). UPDATE 1-Goldman Sachs gets strong demand for landmark Sukuk issue. Thomson Reuters. Retrieved from

Narayanan, A., & Hamzah, A.-Z. A. (2014). UPDATE 3-Goldman Sachs plans debut sukuk issue as Islamic finance goes mainstream. Dubai/Kuala Lumpur: Reuters. Retrieved from idUSL5N0R513N20140904#KKQbbYXyHazVtqpi.99

Parker. M. (2012). The lessons from the Goldman Sachs proposed $2bn Sukuk saga.  ARAB NEWS, Retrieved from

Platt. G. (October 09, 2014). GOLDMAN SACHS TO TAP GROWING ISLAMIC MARKET. Global Finance Magazine, Retrieved from

Reuters. (2014, September 18). Middle East Banks Buy Vast Majority of Landmark Goldman Sachs Sukuk. Gulf Business. Retrieved November 15, 2015, from

The base prospectus of Goldman Sachs Global Sukuk. Retrieved from base20prospectus.pdf

Vizcaino. B. (Sep 14, 2014). MIDEAST DEBT-Conventional banks’ Sukuk to push limits of Islamic finance. Reuters Report, Retrieved from

Vizcaino. B. (Sep 4, 2014). UPDATE 3-Goldman Sachs plans debut Sukuk issue as Islamic finance goes mainstream. Thomson Reuters. Retrieved from

Wouters, P. (2012, January-February). Goldman Sachs : Genuine or Ribawi Sukuk in the Making? Business Islamica Magazine, pp. 34-37.



Sukuk defaults – Country wise analysis

By : Haifa Al Mahmoud, Malak Bakhsh, Sara Aref

Effat University.


The Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) defines sukuk as certificates that provide the investor the right to own the underlying revenue-generating assets and rights and/or services, besides of the income stream they might yield. Sukuk are normally ruled by English law in cases of dispute or arbitration, owing to its trustworthy law provisions.

Since mid-2000s, Sukuk emerged with growing popularity as a realistic and practical shariah compliant long-term financing tool. Malaysia is the largest country in the world for sukuk market, and is committed to continuously advance its financial services industry to meet the ever growing needs of its stakeholders who include, businesses, investors, and the government. Additionally to appeal on the regional and global market levels. This has led to the Sukuk markets around the world to grow and raise significant sources of capital despite a series of substantial amount of sukuk defaults in the Gulf Corporation Countries (GCCs) had blemished the market’s confidence on sukuk, as well as some Malaysian cases such as of Johor Corporation, Ingress Sukuk, Tracoma Holdings, and Nam Fatt Corporation.

Implications of sukuk default

Sukuk defaults elevated numerous questions about the underlying structures and capability of the sukuk as an alternative source of funding as this is issue very crucial since it affects the welfare of all the involved stakeholders. This has laid down more emphasis on the need to identify default risk in sukuk in order to better supervise and manage its affiliated risks. High degree of certainty was needed concerning the post-default process in sukuk transactions since the risk for a default is inherent in all sorts of transactions. Now, the utmost carefully structured products could flop due to conditions beyond investors’ control.

Therefore, this paper aims to shed light on the issue of sukuk default and its implication on several cases. Also, it attempts to analyze the implication of sukuk default on a country’s reputation, the legal aspect and on the investor’s protection.

Sukuk market

As previously mentioned above, the market for sukuk has developed quickly over the last few years with regards to size, numbers, and complexity. Sukuk is now known as a substitute for conventional bonds and is employed in Islamic financing framework for the last two decades. It provides access to foreign governments and corporations to an enormous and increasing Islamic liquidity pool of funds, other than conventional methods.  

While sukuk are supposed to be more secure than the conventional bonds, since they are performed only on asset backed assets, sukuk are now asserted to have lost trustworthiness as a practicable and worthwhile Islamic long-term project financing instrument. Due to the complexity of their structure and several legal issues, it was difficult to apply a reliable rating process for sukuk. However, from a rating view point, evaluating the risk of the issuer’s innate credit strength is central to the final rating result. This was acknowledged when a series of default events took place.


For instance, the period 2003 till 2010 witnessed a series of default in some counties. On top of them is Malaysia with nine big cases, then Pakistan with two and one default event in each of Saudi Arabia. Kuwait, and the USA. Those default cases are: Saad Group’s Golden Belt($650 M), East Cameron Gas ($165.6 M), The Investment Dar Company($100 M), New Allied Electronics Indus-tries ( $ 16.4 M) + Maple Leaf(Rs8 billion), Oxbridge Height ($2.82 M), Hartaplus, Ingress ($ 7.2 M), Oilcorp Bhd ($ 20.6 M), PSSB Ship management (RM40 m), Tracoma Holdings (RM 100 m), M-Trex Corporation (RM 60 m), Englotechs HOLDING (RM 50 M), Straight A’s portfolio (RM 200 M), and Malaysian International TunaPort (RM 240 m ). Based on information from RAM rating agencies, there were 24 recorded default events in Malaysia over the period 2003-2010. Other defaults did follow the ones mentioned earlier. A sample of those defaults will be discussed in the next part in this research along with the reasons that lead to their occurrence.


Court cases relating to defaulted sukuk

The first case of default revolves around East Cameron Partners (ECP). The structure of the sukuk was made in the following sequence. The issuer SPV, East Cameron Gas Company (ECGP), which is incorporated in Cayman Islands issued USD165.7 million worth of sukuk. The proceeds of the sukuk would be employed to buy the ORRI from the Purchaser SPV, just after the Funding Agreement for USD$ 113.8 million would be made. The left over sum was to be used for a development plan, standby account, and to purchase put options for natural gas to hedge against the risk of fall in gas prices. Then, the originator paid his share of the capital in the form of a transmission of ORRI into the buyer SPV. The next step was that the purchaser SPV would be holding ORRI in the properties, would then entitled to around 90 percent of East Cameron Partners’ net revenue generated though gas production. The gas and oil production would be sold to two sources with Merill Lynch acting as a backup. The Proceeds of the oil and gas sale would be channeled into an allocation account.  When sukuk reach maturity, the issuer SPV would exchange all the sukuk against the amount left to be transferred to the sukuk holders.


Reason of default was because that the originator attempted to wrap the sukuk assets that was royalty interests on oil and gas revenues kept by an offshore special purpose vehicle (SPV), into its domain, while the sukuk issuer had been publicized as bankruptcy tool. Meanwhile, the assets were moved in a seemingly shariah compliant true sale. The court holding was that the originator had already sold the underlying assets in a true sale deal.

The second case was for a 5-year musharakah sukuk was issued by The Investment Dar (TID) with the association of ABC Islamic Bank (Bahrain) in 2005. The sukuk offered 6-month LIBOR plus 2% annual, while the 2006 sukuk issue guaranteed a LIBOR plus 1.25 percent for the first 3 years and LIBOR plus 1.75 percent for the rest of the remaining period, to be paid every six months. The Sukuk issued in 2005 were registered on the Bahraini Stock Exchange whereas the 2006 sukuk were issued and registered in Dubai International Financial Exchanges. The first issue was limited and was established in the Cayman Islands. Next, sukuk are issued by the SPV to sukuk investors, primarily against the proceeds of the sukuk. The second issuance was a trust agreement with sukuk holders, the SPV entered into a musharakah agreement, in which the SPV capitalized the proceeds of the sukuk to hold 48.78 of musharakah capital. Instantaneously, the originator, TID, paid its share by shifting all rights, benefits, and entitlements to the TID vehicles and property to musharakah, valued at $157.5 million valuation as specified by a third party and arranged by the partners, thus acquiring the outstanding 52.22 percent of capital in musharakah. The total amount was invested in the motor vehicles and in property assets. The musharakah assets were converted into 150 units, in which TID acquired 76.83 units and the issuer held 73.17 units. The agreement was that the returns on the underlying assets were to be split among the SPV and TID. For more security for the investment, the originator offered an undertaking to repurchase the SPV portion in the underlying assets at the end of sukuk period or in case of early insolvency. As agreed upon between the originator and the SPV, management of the musharakah would be carried out by the originator, in exchange for a fee and plus an incentive fee in case the musharakah accounts would provide a net profit during a given time. The structure of the sukuk was approved by the shariah boards on each partner side.

Later when the agreement took place, TID defaulted under a $100m sukuk in January 2009. The sukuk was ruled by English law using an offshore SPV and the underlying assets were located in Kuwait. Since the sukuk were asset-based, investors were at the theoretical positon to sell the assets if TID.  Following in March 2010, TID gained court defense under Kuwait’s new financial firmness law that ceased all lawsuits related with insolvency towrds TID. TID subsequently settled with Sukuk holders on a six year period of restructuring.



Reasons for Default

TID was in good financial condition till 2007. But during 2008, TID reported a net loss of KD 80. 3 million, for the first time since its foundation. Two reasons were behind this situation. First, was the unrealized losses of KD 88.14 million relating to an impairment in the value of investments in associates. Second, was the actual realized losses of about KD 9.3 million on investments, which in the eventually led to the downfall of the company. During late 2008, TID defaulted on its debt obligations as to liquidity problems. Early in 2009,TID entered in a debt restructuring plan.  




The third sukuk default occurred on mid-2009, where a Saudi business company defaulted on periodic disbursements. Consequently, Moody’s lowered the rating of the company to junk grade. Few banks in the Gulf were affected harshly by the Saad sukuk default for of their exposure to the deeply distressed Saudi conglomerates who are Saad Group and Ahmad Hamad Al Gosaibi and Brothers.  

Saad Sukuk Structure was based on lease and sublease contracts. The transaction was structured according to a head lease agreement, Golden Belt 1 Sukuk Company, which is a SPV listed in Bahrain, entered into a long Head Lease Agreement with the chairman of Saad, in which the SPV, as head lessee, obtains some land parcels on lease from the Head Lessor, Mr Al-Sanea, for 25 years maturity. The net takings of the sukuk would be employed to pay the total rental amount due in upfront by the issuer/head lessee to the head lessor. Then, the Golden Belt 1 issues sukuk of $650 million in exchange of the leasehold rights on the land parcels and pays full rental payment upfront to owner of Saad Group. Afterwards, according to a sub-lease agreement, Golden Belt 1 sub-leases the land parcels to Saad for five years in return for half yearly rental payments at LIBOR plus 0.85 percent, which happened to be the same return as paid for the Sukuk that was an Ijara contract. This would lead to Saad transfering the rental amounts to the SPV at the promised rate, which enables the SPV to transfer the rental amount to the sukuk holders accordingly. Once they reach maturity, sukuk are then exchanged by the sukuk holders, Saad transfers the sukuk amount to the SPV. 7. The SPV, subsequently pays out the sukuk amount to the investors.


Reasons for Default

Saad company had a huge default amount that was $15.7 billion, comprising its Islamic bonds. Saad was confronted with huge liquidity crisis during 2008 and was not able to service its debt obligations promptly. The originator company was surprisingly providing improper and misleading information that was not never delivered to the regulators. Consequently, the Saudi Arabian Monetary Authority (SAMA) halted Saad group assets on May 2009. Additionally, was accused of dishonesty and fraud and was charged of USD10 for misappropriation of the funds of Algosaibi Investment Holding company, the formal owner of the SPV. As a result, the accounts of Saad in Cayman Islands, which were valued at around $9.2 billion, were frozen by November 2009.


The fourth and last sukuk case to be discussed in this research will be Nahkeel sukuk, which was Dubai-based. Nahkeel was a high profile and the largest ever sukuk default case to date. It was issued late in 2006, with maturity of 3 years, which raised a total of $3.5 billion. The sukuk were registered on the Dubai International Financial Exchange. The purpose of the sukuk was to finance a property development project for one project in Dubai, which is Nahkeel Co. PJSC. A SPV was established for this purpose under the name of Nahkeel Development Limited. The originator, Nahkeel Holdings 1, was a subsidiary of Nahkeel World, which was itself owned by another public sector company, Dubai World. Nahkeel Holdings 1, Nahkeel Holdings 2 and Nahkeel Holdings 3 held full ownership in Nahkeel Co. PSJS. The sukuk had the status of a sovereign bond by the rating agency as they were issued by public sector.  Investors then, expected an implicit government warranty for the sukuk. In addition the sukuk had a Moody’s (A1) and Standard & Poor’s (A+) ratings.


The Nahkeel sukuk had been issued on an Ijarah manfaa basis, which enabled sukuk holders’ to obtain the leasehold interest of the primary assets without transferring the title of the assets to them via SPV. Thus, Sukuk holders had only the right to the stream of income generated by the assets but not on the assets themselves.

The agreement was structured that the SPV, namely Nahkeel Development, would issue Nahkeel sukuk to raise $3.5 billion to purchase the leasehold interest in definite land, building and other property at the Dubai Waterfront, which was valued at that time at AED 15.5 billion in 2006 by Jone Lang Lassalle. The SPV would then transfer the collections of the sukuk to Nahkeel holding 1 and purchases leasehold rights of the underlying properties from Nahkeel Holding 1, for 50 years. Additionally, the SPV, would lease the sukuk assets to Nahkeel Holding 2 for a period of 3 years. The SPV would upon maturing of the lease period at specific price and with payment of the other half of the rental payments.

By November 2009, Dubai World demanded a restructuring of its $26bn debt. Investors feared that its $4bn Nakheel sukuk would also default. The sukuk was governed by English law and structured using English trust law concepts to bestow only beneficial ownership on the investors in the form of leasehold rights. Significantly, leasehold rights are not deliberated real rights under UAE law, where the assets indirectly owned by the government were located. Eventually, the default was prevented by Abu Dhabi bailout of $5 billion.


Reasons for Insolvency/default

On the outbreak of the financial crisis over the period 2007-2009, the macroeconomic condition forced Dubai’s government to seek a standstill for $59 billion debt owed by one of the state-owned companies Dubai World, including Islamic sukuk of 3.5 billion. Several factors interplayed and lead to the factors which caused Dubai World to in effect default, including huge short term borrowings, decrease in oil prices, the explosion of the real estate price bubble because excessive supply of residential and commercial properties. At that time, the value of Nahkeel was not clear. Furthermore, the guarantee of Dubai World became worrying since the holding company itself was additional negatively affected by the financial crisis. Moreover, being a holding company, Dubai World may have superior creditors than sukuk holders. Finally, the sukuk’s default was activated by the exact financial situation of the obligor. It was held that if the majoirty of funds in related parties had been utilized sensibly, the halt demand for at least the Nahkeel sukuk, could have been prevented.



Despite the defaults which faced Islamic sukuk in the past years in several countries especially in the gulf however it seems Islamic sukuk are still in demand and actually growing and becoming very popular, perhaps due to the increased regulation. This demand can be attributed to that Islamic sukuk are founded on Shariah principles and on real assets such as real estates.

The overall market sentiment show that many investors and business yet believe in rightly believe that Islamic sukuk have decent investment forecasts and are safer than other forms of investment investments when compared with other conventional instruments..…/Shocking_21_defaulted_sukuk_cases_in_the_last Sukuk Defaults: On Distress Resolution in Islamic

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