​Islamic Finance – Islamic Capital Market - Arguments against the Sukuk's Capital Guarantee Clause

​Islamic Finance – Islamic Capital Market - Arguments against the Sukuk's Capital Guarantee Clause
This has been equated by opponents of a capital guarantee provision with a capital guarantee, which they believe should be avoided. They contend that even in cases where the issuer has failed to produce sufficient income, a purchase undertaking based on Wa'd will secure or guarantee the capital or investment principal. In actuality, this will absolve Sukuk investors of the danger of capital loss. 

They contend that the capital has been guaranteed under all conditions by the formula for the exercise price of the purchase commitment in these Sukuks. It has been hotly debated among Middle Eastern academics whether the manager (of Mudarabah), the partner (in Musharakah), or an agent should be the one to issue a purchase undertaking promising to buy the Sukuk assets for a price equal to the Sukuk's face value. Many Shari'ah principles, including the pertinent Shari'ah standards of AAOIFI, have been cited by scholars who oppose this practise. These principles essentially forbid or disallow any kind of capital assurance. While supporting the ban on capital guarantees, academics who have endorsed this practise have argued that this purchase endeavour won't necessarily result in a capital guarantee like in the case of a conventional bond. 

A point that makes an Islamic Sukuk different from the conventional bond, though it includes a purchase undertaking provision, is that the undertaking is to purchase the assets of the business venture. The capital redemption is not an endeavour. Therefore, the Sukuk owners would be responsible for paying any losses if the venture's assets were damaged or completely lost.

 This characteristic sets it apart from a typical bond and represents the loss sharing idea. In a traditional structure, the investment's capital is always required to be repaid. It is therefore feasible to have a redemption clause or put option price that protects the investment's principal thanks to the Ijtihad and the supporting scholars' viewpoints.