SUKUK DEFAULT: IS IT TRULY A DEFAULT?
As indicated in a previous posting, sukuk if properly understood means certificates proving ownership of underlying assets that back up the issuance of such certificates which are for all intent and purpose issued to testify that a certain sum of money has been invested and handed over to the issuer/manager. Sukuk as per the generally accepted global definition means investment certificates of equal value issued to investors as documentary proofs of their investment. They are not debt certificates as wrongfully described by some uninformed writers unless they talk about certificates as issued in Malaysia as part of what is known as IPDS (Islamic Private Debt Securities) backed by BBA debts in which case such certificates are truly debt certificates. This IPDS cannot be considered as sukuk according to the global definition especially in the context of a relevant resolution on Sukuk Muqaradah (Mudarabah) passed by the OIC Fiqh Academy in 1988 .
True sukuks must confer true right of ownership to sukuk holders in the manner recognized by the Shariah, the same to be made available to them as true owners of the underlying assets that back up the sukuk which initially means the money capital handed over to the issuer as part of the investment. The issuer then is expected to utilize the fund to purchase productive or trade assets to be dealt with accordingly in the ensuing business to be carried out to garner profit for the investment. In this context the issuer cum manager is to act as an agent for the sukuk holders or investors in conducting the trading business or in managing the project for which purpose the sukuk have been issued.
Provided the agent/issuer/manager has conducted himself as expected ( on best effort basis) and without negligence or be in breach of the terms of the investment contract/sukuk deeds, if loss should occur then as a general rule he is not to be held liable precisely because he has been acting as an agent whose liability is fault-based. If ever he is to be held liable for the loss, the sukuk holders must come with acceptable evidence to prove it. Juristic opinion however differ in terms of how the manager’s statement as to the cause of the loss is to be relied upon: whether it is to be taken at its face value or he needs to be asked to take an oath of assertion that such loss is not due to his negligence or wrong doing.
Given this Shariah position, hardly that one can compare this position with that of a default in the context of debt securitization (bond) as understood in the conventional sense where default there would means inability of the issuer to pay coupon as agreed or to be unable to redeem the principle at its face value upon maturity. In the case of the sukuks however, there will be no default if non-payment of profit is not caused by any negligence or wrongful act on the part of the issuer/manager as profit is only payable if there has been actual profit realized by the investment. Even if the issuer is unable to redeem the sukuk at the end of the period as agreed, if such inability/loss is occasioned by no fault on his part, such loss is to be borne by the investors or sukuk holders who are in fact entitled to get back the remaining portion of any assets that belong to the fund at the material time meaning; that they must have a right of recourse to the remaining asset of the sukuk. This is only possible if the sukuk are aseet-backed sukuk and not the asset-based ones. In order for sukuk to be valid from Shariah perspective, the issuance must be in the form of asset-backed that should confer true right of ownership to the sukuk holders of all the underlying assets that backed up the issuance.