THE LEGAL CHALLENGES ARISING OUT OF SUKUK STRUCTURES AND THEIR IMPACT ON ECONOMIC DEVELOPMENT A Case Study Analysis of the Gulf Region

Abstract

This dissertation examines the legal implications of how sukuk is structured, and whether those legal challenges could hinder sukuk’s potential towards economic development. Evidence based research discussed in the chapters to this dissertation suggest that sukuk has the potential to foster economic development but the way in which sukuk is structured leaves investors vulnerable to significant risk in the event of a default. These risks arise out of the legal conceptualisation of sukuk either as asset based, secured asset based or asset backed sukuk. The way sukuk is described can present interpretative problems in the event of a default. These interpretative problems arise because sukuk is generally understood as secured investments in assets – but the recent cases in relation to sukuk defaults by Kuwaiti and Saudi conglomerates show that the law is not clear on whether the general definition creates a secured or unsecured creditor. The need to set out whether sukuk creates a secured or unsecured creditor is therefore necessary. Whether this has implications for economic development is then assessed in the dissertation.

The main recommendation is for the GCC region to establish a centralised Shari’ah Supervisory Board is made. This Board is to assess the legal implications of every sukuk issued in GCC to ensure legal certainty in sukuk investments, especially on the recourse in the event of default. Since tax reforms do contribute towards economic development, a proposal for tax reforms is also made as part of an incentive package to investors to invest in sukuk.