Sukuk Securities: New Ways of Debt Contracting

CHAPTER 12 The Foundation and Principles of Islamic Finance

This chapter provides the general foundation and principles of Islamic finance. This discussion will place sukuk securities within the ambit of design features common to Islamic (participation) finance. The governing principles are profit and loss sharing, risk sharing, fee-based transactions (not discussed up to now), the prohibition of excessive uncertainty and ambiguity (gharar, maysir, and qimar), information symmetry, and the prohibition of riba (interest).

FOUNDATION

Shari’ah-based financial transactions have their roots in the Quran and the Sunnah, the body of practices of the Prophet Muhammad, refined over 1,400 years from the time his mission that began in 610 CE.¹ The Quran contains commandments prohibiting interest (considered as usury in contemporary interpretation) or contracts with excessive uncertainties (gharar), with speculation (maysir), or chance bets (qimar), such as gambling.

These highly developed financial practices lapsed around 1850 CE, following the introduction and consolidation of Western colonialism, with its laws, practices, secular banking, and capital markets that had disconnected with religion. When political independence freed these colonies from Western financial practices after World War II, there was a collective urge to return to Islamic norms for financial transactions, which were considered more just and ethical.

Hence, Muslims started to avoid some, though not all, Western ...