In the Name of Allah, the Beneficent, the Merciful
All praise is for Allah, Lord of the Universe; and blessings and peace be upon our sayyid, Muhammad, the Seal of the Prophets, and upon all of his family and companions.
Decision No. 137 (3/15) Regarding Rental Sukuk
The Islamic Fiqh Academy of the OIC, in its fifteenth session, held in Muscat, Oman 14-19 Muharram, 1425 AH/6-11 March, 2004 CE, after hearing the research papers presented to the Academy on the topic of rental sukuk, and after listening to the discussion generated on the subject, has decided the following:
- The concept of rental sukuk is based upon the principle of securitization (taskeek, or tawreeq or tasneed), i.e., the issuance of financial certificates amenable to circulation, based upon an investment project producing a revenue stream. The aim of rental sukuk is conversion of the tangible assets and the utility arising from them that are associated with leasing contracts into financial certificates (sukuk) that it is possible to trade in secondary markets. Based upon that, they have been defined as, “certificates of equal value that represent diffused/undivided shares (hisas sha’i 'ah) in the ownership of tangible assets or their income-generating utilities.”
- Rental sukuk do not represent a fixed amount of money, nor are they debts owed by a certain entity―neither a natural nor a legal entity. They are only financial certificates that represent diffused/undivided shares in the ownership of a tangible asset being put to use, such as real estate, an airplane or a ship, or a pool of such assets, whether of the same or differing specifications, when they are leased and, thus, yield a defined revenue as a result of the lease contract.
- Rental sukuk may bear the name of their owners, in which case a transfer of ownership is accompanied by an entry in a specific registry or by writing the name of the new owner on the certificate each time ownership is transferred; or they may be anonymous certificates, such that a transfer of ownership is simply effected by a physical transfer of the certificate to the new owner.
- It is permitted to issue sukuk that represent ownership of a leased tangible asset―when the conditions are met for property that may validly be the subject of a rental (ijarah) lease, such as real estate, an airplane, a ship, etc.―as long as the sukuk represent ownership of real tangible assets that are being leased and, thus, yield a defined revenue.
- It is permitted for the owner of a sukuk certificate to sell it on the secondary market to any buyer at a price agreed upon between them. It doesn’t matter if the price is the same as, less than, or more than the price at which it was bought. That is in consideration of the fact that the value of assets is subject to the market factors of supply and demand.
- The owner of a sukuk certificate has a right to his share of the revenue―i.e., the rent―at the times stipulated as terms for the sukuk when they were issued, minus those expenses for which the lessor is responsible related to the upkeep of the property and other obligations entailed by the leasing contract.
- A renter who has the right to sublet is permitted to issue rental sukuk that represent the ownership of the usufruct that he/she took possession of by the lease contract with the intention of subleasing. The condition for that is that the sukuk be issued before the contracts are signed with the [sublet] lessees. It makes no difference if the rent for the secondary leases is the same as, less than, or more than the rent for the original lease. However, if leases have already been signed with the second-tier lessees, then it is not permitted to issue sukuk because they would now represent debts owed by the lessees to the sukuk issuer.
- It is not permitted for the issuer or administrator of the sukuk to guarantee the value of the sukuk certificate itself or the revenue; and if the leased assets should be damaged or destroyed, it is the sukuk certificate holders who will bear the loss.
The Academy also suggests the following:
A forum should be convened specifically for the study of the rules applicable to specific applications mentioned in some of the research papers [presented to the Academy], about which this resolution has not delivered any judgment. That should occur in coordination with the concerned financial institutions. The Academy will then be able to issue judgments about those applications on the basis of the conclusions arrived at in the forum. The most important unresolved issues are:
- The rule on issuing sukuk for the ownership of assets being rented by leases that will terminate in a transfer of ownership back to the one from whom they were purchased.
- The rule on issuing and trading sukuk for forward ijarah leases.