Adequacy of regulation and supervision in sukuk default : a juristic analysis of cases in Malaysia, United States of America & United Arab Emirates

Abstract

The growth witnessed by Islamic finance industry in the last decade has attracted investors across the globe particularly in ṣukūk investment. Notwithstanding the success recorded, the incessant ṣukūk default cases have shown that sukuk is not immune to credit and moral risk among others. Thus, the nascent industry at a crossroad triggering questions and queries about the rights and protection of the ṣukūk holders in the event of default and bankruptcy. This study aims to explore the adequacy of regulation and supervision in default ṣukūk, explaining the concept of default, highlighting the causes of default ṣukūk,and its effects on stakeholders such as debtors and creditors. The study also analyzes sukuk default cases from the jurisdiction of Malaysia, United states of America and United Arab Emirate. The research adopts qualitative methodology through the triangulation approach to data gathering and analysis. The study relies on textual evidences and experts 'opinions in putting together some of the Islamic fundamental principles, maxims and criteria for protecting the right of creditors and debtors particularly in cross-border ṣukūk investment in Malaysia, UAE and USA. The study has found that in the remedial options in the event of ṣukūk default depends on the contractual document between the parties. The study has also discovered that the rating agencies and exiting jurisdiction law has a significant influence on the protection of investors’ right in sukuk as implemented in Malaysia whose Islamic capital market is highly regulated to protect the ecosystem. The robust regulation and supervision in Malaysia is responsible for its success story compared to UAE. The study has discovered that the Dana gas debacle has triggered further consideration of tighter clauses to forestall moral hazard cause by shariah compliance argument. The study therefore recommends the need for the principal regulatory agencies to ensure the clauses are in compliance with shariah fundamental principles.