Academic journal article Chicago Journal of International Law

New Horizons for Islamic Securities: Emerging Trends in Sukuk Offerings

Academic journal article Chicago Journal of International Law

New Horizons for Islamic Securities: Emerging Trends in Sukuk Offerings

Article excerpt

I. INTRODUCTION

Shari'ah-compliant finance and investment products are fast becoming part of the mainstream of the world economy as Muslim money is increasingly integrated into global capital markets and, generally, the commercial finance system. Once largely restricted to the Middle East and Southeast Asia, Islamic finance and investment now permeate markets throughout Europe, Asia, and even the US. As a number of countries in the Islamic world, emboldened by sustained increases in commodity prices and higher levels of foreign direct investment, look beyond traditional borders for investment opportunities, new forms of Islamic finance and investment have emerged. Perhaps the most significant recent development has been the emergence of sukuk (which roughly translates to "certificates")-in essence an asset-backed security structured in compliance with the precepts of Shari'ah, somewhat similar to a trust certificate or bond. Initially focused on assets situated inside countries within the Islamic sphere of influence and promoted largely by Muslim financial institutions, sukuk issuances have expanded almost overnight to include offerings by such diverse participants as the German government and, most recently, an oil and gas company in the US. The characteristics of sukuk have made it an attractive source of capital for issuers outside of the Muslim world seeking to tap into the liquidity currently offered by Islamic investors, particularly in the Persian Gulf. Despite their brief history, sukuk offerings have raised billions of dollars and have provided needed capital for infrastructure projects, corporations, and governments. Whenever sukuk offerings are backed by assets not already governed by Islamic law, however, special considerations arise. In such situations lawyers, financial institutions, and potential issuers contemplating transactions involving the confluence of Shari'ah and Western legal systems must approach sukuk offerings with a firm understanding of the complex legal principles involved.

Some recent developments in the US are of particular significance in the context of the growth of sukuk offerings. While the general expansion of sukuk beyond the immediate Islamic world represents a noticeable shift in the origination and marketing of Islamic finance and investment products, the pioneering use of sukuk in the US marks the most dramatic extension of Islamic finance into the world's most sophisticated capital market. The first US sukuk is a product of the unique marriage of American oil and gas law with Shari'ah concepts, two jurisprudences that complement each other surprisingly well.1 Given the compatibility of sukuk with US oil and gas law and the voracious appetite for capital in the petroleum industry, sukuk may provide a relatively small but important (and, in nominal dollar terms, potentially very large) contribution to the growth potential of the energy industry and create additional outlets for Muslim capital investment.

This Article seeks to demystify sukuk by providing an analysis of the nature and application of sukuk structuring techniques, with an emphasis on legal considerations, in the rapidly changing world of Islamic finance.2 It also attempts to explore emerging trends in the rapidly evolving marketplace for sukuk investments. In particular, this Article will evaluate both the underlying legal principles involved in innovative sukuk structures and the use of assets in nonIslamic jurisdictions to back securitizations represented by sukuk certificates. After providing a general explanation of the fundamentals of sukuk as an Islamic investment vehicle and an overview of the growing importance of sukuk in the marketplace, this Article will turn to a discussion of the primary legal challenges of utilizing assets to back sukuk offerings in non-Islamic jurisdictions. In addition, this Article will provide an analysis of key conflicts of law considerations posed by the "exportation" of sukuk products outside their traditional markets. …

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