Question

In: Accounting

Rajbi Corporation is a renowned Islamic bank in Pakistan. They have issued Sukuk certificates worth of...

  1. Rajbi Corporation is a renowned Islamic bank in Pakistan. They have issued Sukuk certificates worth of PKR 10, 00,000 based on their awesome credit worthiness in the local market. The maturity period for the certificates is 10 years.Rectify whether this product is Shari’ah complaint. If no, discuss the reason.

Solutions

Expert Solution

Ans: A sukuk Certificate worth PKR 10,00,000 with a maturity period of 10 years is a not Shariah Compliant.

Explanation:

Shariah- Shariah is an Islamic Religious law governing not only religious rituals but also day to day life in Islam.

Shariah Compliant- Shariah Compliant Funds are the investment funds that follow the principles of Shariah Law and the principles of the Muslim religion. These funds are considered to be socially responsible Investment.

Sukuk Certificates- With the rise of Islamic finance, Sukuk have become extremely popular since 2000. A Sukuk is an Islamic Financial Certificate similar to a Bond in western Finance that complies with Islamic religious Law i.e., Shariah Law. They represents a portion of ownership in a portfolio of eligible existing or future assets. They can be considered as an Islamic version of conventional bonds.

Shariah law prohibits repayment with interest (riba). It is considered as exploitive in nature and therefore, bonds are forbidden in Islamic Finance. Most Sukuk have maturity of 3 to 5 years.

Sukuk does not represent a debt obligation. Upon its issuance, the issuer sells certificates to investors. Then, the issuer uses the proceeds from the certificates to purchase the asset, and investors receive partial ownership of the asset. The investors are also entitled to part of the profits generated by the asset.

Therefore, the Sukuk Certificate worth PKR 10,00,000 is not a Shariah Compliant as the comparative study indicates that Sukuk has maturity period of 5 years and it has remained same in last 10 years.


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