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good background on the 'sukuk' here

http://www.islamicfinance.de/sukukrisks.pdf

MANAGING FINANCIAL RISKS OF SUKUK STRUCTURES

II. ISLAMIC FINANCIAL ASSETS: OVERVIEW OF THE THEORETICAL ASPECTS

Islamic finance offers an alternative financial paradigm. It is unique in that religious doctrines are avowed in the commercial and financial behaviours, transactions and sectors. The presumption that finance and economics are independent of religious considerations is challenged to the extent that an Islamic financial industry is thriving.

2.1 PROHIBITIONS
The Islamic finance paradigm is based on the following set of prohibitions:

i. Transactions in unethical goods and services;
ii. Earning returns from a loan contract (Riba/Interest);
iii. Compensation-based restructuring of debts;
iv. Excessive uncertainty in contracts (Gharar);
v. Gambling and chance-based games (Qimar);
vi. Trading in debt contracts at discount, and;
vii. Forward foreign exchange transactions.

These have important implications for the nature of financial assets, trading in these assets, for the risks of the assets and their mitigation and for management of Islamic financial assets. We need to elaborate on some of these aspects before continuing. The other points will be referred to in the research at appropriate sections.

2.1.1 Prohibition of Riba (Interest)

Riba (Interest) is any return/reward or compensation charged on a loan contract as well as charged in rescheduling debts. Riba is strongly prohibited in Islam. Muslim scholars and jurists have rigorously discussed the rationale of the prohibition and its alternatives (see, Siddiqi 2004 for more detail). The economic implication is that money is considered as a medium of exchange effectively created to be sought not in itself but for other commodities. Thus, charging interest on loans is considered unjust since money is considered to be simply an intermediary between goods. Recently scholars have also placed increased scrutiny on not only the rationale for the prohibition of interest but also on the lack of theory in support of interest. Mirakhor (1995) provides an overview of recent discussions concerning this theme. He refutes numerous arguments that lend support for the existence of interest as a backbone for conventional financial markets. It is maintained that when money is loaned, the funds are used to create either a debt (in which case there is no warrantable rationale why the lender should accept a return) or an asset (in which case there is no justifiable reason why an unconditional assurance of interest should be imposed by the market).

2.1.2 Prohibition of Gharar (Excessive Uncertainty)

There are many strong references in Islam admonitory of aleatory transactions. The main justification is that gambling (maysir) invokes enmity among the parties. However, the definition of Gharar involves a sense of legal trepidation. Commercial gain in itself is not illicit but one would be hard-pressed to find instances of modern day business that did not involve a sense of uncertainty. Of imminent concern to Shari’ah scholars and practitioners alike is the scope of uncertainty that transforms commercial gain into unlawful Gharar.

Gharar is a by product of uncertainty. In an uncertain world of financial and commercial transaction, the issue becomes how one can take economic initiatives that can be free of Gharar. There is an inherent lack of studies concerning decisions under uncertainty from an Islamic perspective. Al-Suwailem (2000), attempts to deal with this problem by putting forth a suggestive study addressing the need to differentiate between ‘gambles’, and ‘decision under uncertainty’. It is argued that decisions under uncertainty, as opposed to gambles, imply evaluating the market value of causality such that the value of these causes will offset any potential losses. Gambling is overwhelmingly considered as amounting to Gharar since it is a zero-sum game. However, if the situation is such that the players are providing a prize and that there is one ‘neutral’ player who does not contribute to funding that prize then the arrangement would become Shari’ah compliant. The neutral player transforms the arrangement from a ‘zero-sum game’ into one that is not. This dimension of Gharar will be discussed further when discussing the applicability of embedded options and synthetic derivatives within Sukuk structures. Similarly, a distinction can be made between gambling and investing in stock markets. Buying a lottery ticket may not be readily comparable to investing in the stock of a company. Whereas in a lottery the participant gains at the ultimate expense of everyone else, in a stock market or any other legitimate trade everybody can be a ‘winner’ if systemic economic conditions allow it to be so. Therefore, the lottery ticket amounts to a ‘zero-sum game’ but the stock market or any other legitimate trade does not necessarily.

2.1.3 Avoidance of Unethical Investments and Services

Shari’ah scholars have been unanimous in disapproving of investments in business sectors that may be deemed as ‘unethical’ such as casinos, tobacco companies, wineries, sex-business etc. Market discipline has transformed these ethical issues into stock screening methods. The screening methods of the Dow Jones and Financial Time’s Islamic Markets Indices exemplify this. Muslims consider religion as more than just a prescribed set of rituals. It is a way of life embraced in the wisdom that there is no more comfortable approach to life. Accordingly, the definition of a Muslim is all-encompassing and is reflected by the individual’s attitudes outside of places and periods of worship.

EVOLUTION AND PROFILE OF SUKUK STRUCTURES AND MARKETS

Generally, Sukuk are asset-backed, stable income, tradable and Shari’ah compatible trust certificates. The primary condition of issuance of Sukuk is the existence of assets on the balance sheet of the government, the monetary authority, the corporate body, the banking and financial institution or any entity which wants to mobilize the financial resources. The identification of suitable assets is the first, and arguably most integral, step in the process of issuing Sukuk certificates. Shari’ah considerations dictate that the pool of assets should not solely be comprised of debts from Islamic financial contracts (e.g. Murabaha, Istisna).