Sukuk Securities: New Ways of Debt Contracting

CHAPTER 1 Introduction to Sukuk Markets

On Christmas Eve 2013, Pope Francis, in his first apostolic exhortation, pleaded for “a return of economics and finance to an ethical approach which favors human beings.” Instituting an ethical approach to finance is the purpose of Islamic financial markets, which have created securities that conform to Islamic scripture and traditions. In some countries this form of contracting has been dubbed participation finance to emphasize the profit-sharing aspect of this new market practice. Islamic securities are specially tailored financial products that conform to the set of ethical and common law–based financial transaction principles laid out in Shari’ah, or Islamic law. Shari’ah literally means “the way,” and it takes its body of principles from the Quran and the Sunnah (an account of the normative behavior of the Prophet Muhammad). Those principles are strictly applied when designing the financial contracting terms that cover such products. Compliance is assured by a committee of experts working at each financial institution, and the institutions must abide by the rulings of both the national and international committees on compliance standards.

Although sovereign laws enacted by various governments originated with some strong ethical foundations in order to protect people, these were watered down in recent centuries by the power of the moneyed class, which includes modern banks. The result is that some of the high moral edicts that governed ...