Islamic Finance – Islamic Capital Market - Musharakah and Mudarabah Sukuk
Some Shari'ah compliance issues arise from the fact that Sukuks are anticipated to provide a fixed income and to ensure capital. In actuality, an agreement contains a clause of buy commitment by either the issuer/SPV or partner/company to establish a default in the event that the issuer/SPV fails to make the anticipated periodic profit distribution. If this occurs, the holders of Sukuk or investors will have the authority to order the SPV/issuer to buy the Sukuk asset(s) at a price equal to its nominal value. The investment's money will be safeguarded by this clause. Equity-based Sukuk, like Mudarabah and Musharakah Sukuk, are primarily designed to give investors in Sukuk access to the cash flow of the enterprise into which the proceeds of the Sukuk are invested. The proceeds of the Sukuk are used to finance a specific venture done by the issuer, which they would otherwise not be able to commence. Neither Sukuk Mudarabah nor Sukuk Musharakah are built on a fixed-income structure, in contrast to Sukuk Ijarah. Only the venture's financial flows will result in revenue. Therefore, rather than having a set rate of return, the coupon is typically structured as an estimated or expected profit. It is typical for a clause to be included that creates a purchase commitment by the issuer to safeguard investors' money. In the event that the issuer fails to pay the anticipated periodic profit distribution, the investors have the authority to compel the issuer to buy the Sukuk at a specific price, known as an exercise price. The so-called "partnership" must be ended by the issuer buying the venture's underlying assets for a price that is typically equal to the outstanding principal balance plus the anticipated profit owing at that time. Regarding the issuer's buy commitment in both Sukuk Mudarabah and Sukuk Musharakah, there is significant disagreement. The fundamental question is whether or not the purchase commitment would result in a capital guarantee, as this is prohibited by equity-based contracts. The purchase commitment lets investors know that the initiative is likely to succeed. While returns are still attached to the asset, such as in the case of musharakah, the endeavour may be argued to cover fiduciary risks. Even among Middle Eastern academics, there is still no agreement on whether it is permissible.
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