Disclaimer:

I am neither a Sharia scholar nor an authority on Islamic finance. But as someone involved in security selection, and therefore sometimes sukuk evaluation (strictly in consultation with Islamic scholars), I follow sukuks with both professional interest and personal curiosity.

Now, if you are also a sukuk enthusiast you must have guessed by now that the elephant in the room is the draft form of AAOIFI Shariah Standard 62 (62). The draft, released in Nov 2023, is expected to be issued this year, but the exact timeline remains unclear.

Ever since its release, the draft has been the subject of contentious debates.

Critics have panned it as operationally rigid, impractical for sovereigns, and even reductionist in its true sale requirements.

Proponents of the draft like the clear tilt towards Asset-Backed Sukuks (and away from Asset-Based ones).

From a professional viewpoint, I believe, 62’s emphasis on ‘True Sale’, in itself, is commendable.

IMO, it tackles the gradual mission creep in sukuks.

Sukuks were starting to mimic conventional bonds.

In its original form, Sukuks represent ownership, not debt.

62, while contentious, cannot be faulted for lacking in clarity.

By drawing an uncompromising line under Asset Ownership …

… it gets the market to confront a critical question:

Have Sukuks drifted too far away from their original identify and mission statement?

I see another powerful benefit coming through:

Implementation might result in a fork: with Sovereigns issuing Wakalas (predicated on the premise that 62 might make concessions, in its final standard, for sovereigns) and Corporates issuing Ijaras.

The market benefits and everybody wins.

How?

For Sovereigns:

62’s emphasis on ‘true asset transfer’ might cramp sovereigns who often have commingled assets; but that makes Sukuk Wakalas the preferred choice for sovereigns (Wakala means Trustee) and its flexibility with pooled assets (utilities, energy revenues) makes it a great toolkit for scalable, Sharia-compliant funding.

For Corporates:

62 returns the sukuk to its original form ─ turning the spotlight back on Beneficial Owners (instead of Creditors).

That can reroute capital flows into Corporate Sukuks and keep it sticky.

Why?

Because corporations might get a beeline of Buy-And-Hold investors (as investors in Sukuks often are) if they start issuing true asset-backed securities.

So, 62, if implemented, could:

1. Draw the curtain on the “anything goes” era of hybrid structures (While not strictly a Hybrid, you have got to think of Dana Gas here ─ an issuer that infamously defaulted by stating their sukuk had turned Sharia non-compliant)

2. Create a fork: with Sovereigns optimizing Wakalas; corporates perfecting Ijara.

Admittedly, Standard 62 isn’t perfect.

But perfection isn’t possibly the goal.

Clarity is ─ and in that, it has already succeeded