SUKUK AS AN “INTEREST-FREE” FINANCIAL ASSET Translated by: Hakan ŞAHİN Assoc. Prof. Servet BAYINDIR Süleymaniye Foundation Centre of Research on Religion and Nature

Definition of Sukuk A. Lexical meaning: Sukuk ( صكوك ) is the plural of Sakk ( صكّ ) in Arabic. English translation of the word would be the term “security” in finance. B. Terminology: A security is a tradable asset of any kind. Securities may be represented by a certificate which signifies the ownership of the bearer for a certain amount of an asset. The conversion of certain assets to securities is called securitization. Arabic terms would be: التوريق, or التصكيك

1.Treasury establishes an Asset Rental Company (ARC). 2.Treasury sells a real estate to ARC on the condition that it will be bought back from the same price after a certain period. 3.ARC rents the same property to treasury. 4.ARC securitizes the property and sells it to investors in exchange for its rental income. 5.ARC transfers the collected money to treasury as the price of the property. 6.Investors receive the rent of the property periodically from the treasury. 7.When the certificates (securities) fall due, treasury collects the certificates from the investors and gives them back their money as it is prescribed in the contract. 8.ARC transfers the property back to treasury. 9.All of these steps are pursued not arbitrarily, but mandatorily in accordance with the contract and the concerned regulations. Practice of Sukuk by the Treasury of Turkey

This transaction is in fact, neither a sale nor a rental transaction. Evaluation of the Practice

It is not a sale because: Agreements that include selling and buying back the same property after a certain period cannot be defined as a sale. The most important aspect of a sale is that the property should be transferred completely to the buyer and the buyer should have the right to do whatever is desired to do with the property. In this practice, ARC and the investors do not really have a right on the property. It is not a rental transaction because: In a rental transaction, all risks of the rented property should be undertaken by the owner. Treasury undertakes all risks of the property even after selling it to ARC. If the property is to be destroyed by the earthquake, the loss would be borne by treasury and the security holders will still have the right to recieve back their payment. Evaluation of the Practice

International Islamic Fiqh Academy states in its decree dated Sep. 2012: 1.Sukuk practices, in which the full ownership of securitized properties is not transferred to security holders, are not permissible. 2.Sukuk practices, which include a condition for the sold property to be bought back from a certain price after a certain period are illicit. AAOIFI states in its decree dated 2010: 1.Sukuk practices, which guarantee a certain profit or a buy-back are not permissible. (Decrees adopted in the 20th meetings of International Islamic Fiqh Academy between of September 2012 in Algeria. Decree: 20) (188th AAOIFI, Meayir, 2010, p. 243, 244. Decree: 7/8/1/5 and 2/2/5) Decrees on Sukuk

ARC 1- Treasury sells a real estate to ARC on the condition that it will be bought back after 5 years 7- ARC sells back the property to treasury after 5 years 3- Offers securities (sukuk) to investors Treasury 2- Authorizes the bank 4- Investors pay the capital 4- Capital 4- Capital is being paid to treasury 5- ARC rents out the property to treasury for 5 years 6- Treasury pays rent to ARC 6- Rental payment 6- Rental income 7- Capital

The procedure is much more the case of borrowing money from the market by giving a property as a pledge. The amount that treasury pays to security holders in the name of “rent”, is actually the interest that is promised by the treasury to investors. The procedure is just an adaptation of “bay' bi'l-istiglal” which is regarded in classic fiqh literature as an interest-including transaction by most of the scholars. These false transactions generally base on interest-including contracts which are discussed in classic fiqh literature under the names of “bay' bi'l-istiglal” or “bay' al-'inah”. Both of them are classic examples of “usury under the image of commercial activity”. What Happens In Real?

Present practices of Sukuk include interest and thereby are not permissible. What is the decree of Sukuk?

Below changes should be made in the regulations: 1.The transaction between treasury and ARC should be based on either a sale or a rental transaction. 2.If the property is to be sold to ARC, the ownership and the full responsibility of it should be transferred to ARC. 3.If the property is to be rented to treasury after that, all risks and responsibility should be undertaken by ARC as the real owner of the property. 4.ARC should have the right “not to sell it back” to treasury at the end of the rental period. 5.If the property is to be sold back to treasury, the price should be determined by a bargain between the parties or by an independent expert. The practices of Sukuk should be based on legal examples of economic transaction in fiqh literature like mudarabah, musharakah and murabaha; or a real ijarah. Suggestions

THANK YOU Assoc. Prof. Servet BAYINDIR Süleymaniye Foundation Centre of Research on Religion and Nature