The Name is Bond, Sukuk Bond: Pathways Forward for Islamic Debt Financial Instruments in Western Markets

Abstract

Over the last few decades, the market for Sharia-compliant financial products has grown steadily. Despite originating in geographic areas with largely Muslim populations to reflect consumer demand for financial products with terms and structures that were compliant with Islamic law, they have since expanded into Western financial markets—albeit with some hesitation. One such instrument is sukuk—Sharia-compliant, fixed-income capital markets instruments. This note argues that despite the upward trend in adoption of sukuk issuances by Western markets in the last decade, certain qualities of these Islamic law-compliant debt instruments have prevented their full integration into American capital markets. Part I of the note provides an overview of the historical development of the Sharia capital markets, introducing the various forms and structures of sukuk and the regulatory regimes that govern them. In consideration of the history of Islamic finance and the complexities of structuring sukuk, Part II discusses the various barriers to entry that such products have faced in Western markets, including regulatory hurdles, transactional costs, tax implications, recourse, and securities and trading laws. Finally, Part III proposes pathways forward for the expansion of sukuk across global markets, such as tapping into the nascent green investing market or the existing real estate and project finance markets, using asset-based sukuk as the global standard, and predicting movement pursuant to Sharia Standard 62.