Overcoming the Weaknesses in Sukuk: Toward Risk-Sharing Instruments in Islamic Finance

Abstract

This article focuses on the near defaults of high profile sukuk and recommends strategies for preventing defaults in the future. Due to their large size, the near defaults of the ‘mega’ sukuk issued by the subsidiaries of Dubai World had a great impact on confidence in the global sukuk market. The defaults and near defaults dented the reputation of sukuk as securities that offer strong protection to investors. In order to restore investor confidence in Islamic structured finance, a paradigm shift is required in the way sukuk are structured. There is a need to move away from structuring sukuk as bond-like, non-tradable instruments that mimic conventional (unsecured) bonds, and structure sukuk as asset-backed, tradable securities that enable genuine risk sharing, an essential characteristic of Islamic finance.