What Do Asset-Backed Sukuk Holders Own When the Issuer Cannot Pay?

In January 2004, two Bangladeshi companies lost an appeal in London. They had borrowed from Shamil Bank of Bahrain under Murabaha and Ijarah agreements. In court, they argued that these were really interest-bearing loans, and that the Shariah would not enforce them. The Court of Appeal did not agree. The contract was subject to the principles of the Shariah, but it was governed by English law. So English law alone applied. One of the two borrowers was Bangladesh Export Import Company Limited. It is known as Beximco.

Seventeen years later, the same company raised Tk3,000 crore through Bangladesh's first green sukuk. The money went to two solar plants and to its textile division. The information memorandum calls the Beximco Green-Sukuk Al Istisna'a secured and asset backed. It defines the sukuk assets as the solar machinery at the Teesta and Korotoa plants and the textile machinery. Land is not in that definition.

The sukuk is due for repayment by 23 December, about Tk2,800 crore of it, and 22 public and private banks are exposed. The Financial Express reported on 6 November that the trustee holds Tk5.68 billion against Tk28.09 billion payable. The securities regulator will not allow an extension until the project land is handed to the sukuk's special purpose vehicle, and a senior official told the paper that the issuance "was faulty". In July, Beximco refused to mortgage the land, saying the trust deed has no provision for it.

What these holders own is the question a book chapter raised more than ten years ago.

The chapter asked for new laws

The chapter is "Law and Islamic Finance: An Interactive Analysis" by Yusuf Talal DeLorenzo and Michael J. T. McMillen. It is Chapter 9 of Islamic Finance: The New Regulatory Challenge, edited by Simon Archer and Rifaat Ahmed Abdel Karim. Wiley published it in 2013. Its conclusion makes two arguments.

The first argument was hopeful. Using Shamil as its example, the chapter said the Shariah can be respected in any country if the contracts are drafted well. They should be Shariah compliant and enforceable under secular law, without naming the Shariah as the governing law. Where that is not enough, the authors suggested model forms of Islamic contracts that English or New York law documents could take in.

The second argument was a warning. Sukuk would grow only with ratings. Ratings needed legal opinions on true sale, security and bankruptcy. And in many countries of the Islamic world, those opinions could not be given. So the authors called for legal reform, to make way for "an explosion in the issuance of rated sukuk transactions".

The market grew without the new laws

The market did grow. In October 2026, Fitch said global sukuk outstanding had passed US$1.1 trillion. The sukuk it rates at about US$250 billion.

But the growth did not come the way the chapter expected. Fitch says most sukuk are asset-based. Its October 2026 publication highlights that over 93 per cent of the sukuk it rates rank as senior unsecured, and that most rest on the obligor's direct support. In an asset-based sukuk, holders have an interest in the asset, but they look to the obligor to pay. The obligor usually signs a purchase undertaking, a promise to buy the assets back at maturity or on default.

The other two agencies say the same in their own words. When S&P revised its approach in 2015, it said sukuk with such commitments would be rated on a par with the sponsor's senior unsecured rating. Moody's said of three Malaysian corporate sukuk that investors ultimately rely on the credit of the companies behind them. So the agencies rate most sukuk on the obligor. They do not need a true sale opinion for that.

Scholars objected early. In January 2008, Sheikh Muhammad Taqi Usmani was reported as saying that about 85 per cent of sukuk did not comply with the Shariah, because they looked like conventional bonds. In February 2008, the AAOIFI Shariah Board issued resolutions that included the impermissibility of an issuer's undertaking to buy sukuk back at nominal value. The market kept the structure.

Asset-backed sukuk did not disappear. East Cameron Partners had issued a sukuk backed by oil and gas interests in the United States. When it went bankrupt in 2008, it argued that the sale to the sukuk vehicle was really a secured loan. In March 2010, the bankruptcy court rejected that, and title to the leases passed to a vehicle the holders owned. A true sale can hold where the law supports it. Fitch says asset-backed supply is now growing, led by supranational and UK issuers. In September 2026, the Saudi Real Estate Refinance Company brought the first publicly rated RMBS backed by Saudi assets, a sukuk that securitises home purchase plans.

Governments face their own limits. Indonesia's sovereign sukuk law of 2008 sells or leases only the beneficial rights in state assets, and its explanatory note says legal title does not pass. Egypt's sovereign sukuk law of 2021 gives holders a share of the usufruct of state assets, and it does not allow those assets to be sold. The United Kingdom went furthest in 2014. Its issuer took a 99-year lease over government land and buildings and held it on trust for holders, who received an undivided beneficial interest. Even there, repayment came from a purchase undertaking, with direct recourse to HM Treasury. In the sovereign sukuk I checked, holders received beneficial rights or usufruct, not legal title in their own names.

The legal reform the chapter asked for mostly did not happen. The market grew around it.

What holders got when it went wrong

Sukuk defaults are rare. Fitch counted 62 defaults among more than 22,700 sukuk issued up to August 2024, or 0.19 per cent. So the evidence comes from a few cases, and each one turned on its documents and its courts.

East Cameron is the case where holders got the assets. Golden Belt 1 is the opposite. Saad Group's US$650 million ijarah sukuk defaulted in 2009. A 2025 study by Zaheer and van Wijnbergen says title was not transferred in the land registers, so holders had no recourse to the assets and held what was in effect unsecured debt. In 2020 the trustee told holders that their claims had not been recognised in the Saudi proceedings and that appeals were pending.

Nakheel shows the third path. Its Dubai sukuk was asset-based, not secured on the assets. In December 2009, it was repaid on the day it fell due, from a US$10 billion package backed by Abu Dhabi. Holders were paid because a government stepped in, not because they held the assets.

The risk came from the borrower

The chapter asked whether secular courts would enforce the Shariah. The cases of the past fifteen years showed another problem. Sometimes it was the borrower who raised the Shariah, as a reason not to pay.

The first case came in 2009. The Investment Dar, a Kuwaiti company, had taken money from Blom Developments Bank in October 2007 under an English-law wakalah contract. When Blom asked for its money back, The Investment Dar said the contract was not Shariah compliant. So, it argued, the contract was beyond its powers under its own constitution. On 11 December 2009, the High Court held that this was an arguable defence for a full trial. Still, the judge required The Investment Dar to pay the full sum, about US$10.7 million, as a condition of defending. Clifford Chance noted that the company had undertaken that the deals were Sharīʻah compliant, and that it would not claim otherwise.

The second case was bigger. On 12 June 2017, Dana Gas said its mudarabah sukuk no longer complied with the Shariah and were unlawful under UAE law. About US$700 million was outstanding. It had paid holders nothing since April, and a court in Sharjah gave it an injunction the next day. The sukuk had a UAE-law mudarabah agreement and an English-law purchase undertaking. On 17 November 2017, the English High Court ruled against Dana Gas on every point. The judge assumed, without deciding it, that the UAE-law documents were invalid. Even so, he held that the English-law promise to pay could be enforced. The dispute ended in August 2018. Holders received US$235 million in cash and a new US$530 million sukuk paying 4 per cent. All litigation stopped.

Here the chapter's first argument held. What protected the Dana Gas holders was a document that worked under secular law, with no need to refer to the Shariah. Law firms took the same lesson. Covington advised that obligors should state that a deal is Shariah compliant, promise not to challenge it, and put their payment duties in a separate English-law document. Yet what held in court was the purchase undertaking. That is the obligor's promise to buy back, the same feature that makes most sukuk asset-based. The holders were saved by that promise, not by owning the assets.

Malaysia answered the chapter's question differently. In 2019, its Federal Court stated that rulings of the Shariah Advisory Council of the central bank bind the civil courts. The council decides the Shariah point, and the judge decides liability. The case was a bank's ijarah financing, not a sukuk. Still, I think it makes the Dana Gas kind of defence much harder to run in Malaysia.

The documents are moving back to the asset

This year, the old question is returning through the documents. Fitch reports that many GCC issuers now add terms that let the trustee register title to the sukuk assets in its own name after an obligor default, where the law allows it. Fitch says this could support recoveries if enforced. It still does not treat these sukuk as secured, because there is no precedent and the legal framework is uncertain.

Much of this began in the UAE. Fitch says that a 2025 resolution of the Higher Sharia Authority of the UAE central bank on the sale of rights led many issuers to add provisions letting the trustee register the asset titles upon default. The UAE has also changed its law. Article 74 of the Federal Decree by Law No. 6 of 2025 exempts assets bought or sold in Islamic financing or sukuk issuance from registration requirements, fees or similar costs. That is one piece of the legal reform the chapter asked for, twelve years later.

Defaults are starting to test these structures. In July 2026, PT Pos Indonesia missed a profit payment on its ijarah sukuk. It was the first default among the rupiah sukuk Fitch rates. By November, Fitch had cut those sukuk, rated as senior unsecured, to 'D'. In September, the Indonesian agency Pefindo cut a mudarabah sukuk of the state builder Wijaya Karya to idD(sy) after it delayed a profit payment. What holders of these sukuk can claim from the assets is not yet known.

Standard 62 asks the same question

AAOIFI wants to go further. Its draft Shariah Standard No. 62, released in late 2023, would require an actual transfer of legal ownership of the underlying assets and their risks to sukuk holders. Holders would then have recourse to those assets. It asks issuers to do what the chapter said the law in many countries could not yet support.

The market's case is about practice. In March 2025, Fitch warned that sukuk could become equity-like and harder to rate. The rating agencies quoted in a July 2026 ACCA article see both sides. Moody's said a true sale would stop the originator's other creditors from competing for the assets. Fitch said legal ownership alone does not guarantee recoveries.

I do not take a side on Standard 62 here. It does show that the chapter's second argument is not settled. If issuers must transfer ownership, the true sale, registration and bankruptcy questions come back, one country at a time.

Back to Dhaka

The Beximco sukuk shows the same gap at home. To be fair to it, the asset is paying. The Teesta plant earns around Tk50 crore a month, and the power board pays the trustee directly. That is how holders have kept getting their periodic returns. What the plant cannot do is repay the principal by December.

The documents explain the bind. Under the information memorandum, the trustee takes control of the sukuk assets after a wilful payment default of three continuous instalments or twelve months. Because periodic payments are still being made, the trustee says it has no legal grounds to declare a default, and so it cannot start to sell pledged assets. Bangladesh's own Investment Sukuk Rules 2019 ask for a transfer to the special purpose vehicle that is absolute and beyond the reach of the originator's creditors. Yet the same rules also allow sukuk assets to be kept separately identified from the originator's assets instead of transferred. The regulator now wants the land as well as the machinery.

I think the trustee is being asked to secure, at the end of the sukuk's life, what the words "asset backed" suggested at the start. The chapter hoped the law would change first. The market went ahead without it. In Dhaka, the holders of the Beximco sukuk are now finding out what that means.

Disclaimer: The views expressed in this blog are not necessarily those of the blog writer and his affiliations and are for informational purposes only.

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