Application of UK Prospectus Rules to Sukuk

The following is an excerpt from a pre-copyedited, author-produced version of an article by Scott Morrison to be published in the Journal of International Banking Law and Regulation following peer review. The definitive published version ‘The Application of UK Prospectus Rules to Sukuk (Islamic Securities) on the London Stock Exchange,’ Journal of International Banking Law and Regulation (Sweet and Maxwell), Vol 30 Issue 3 (March 2016),  is available online on Westlaw UK or from Thomson Reuters DocDel service.

NOTE: for other publications by the author on sukuk and related materials click here

Legal Analysis

 The Application of UK Prospectus Rules to Sukuk (Islamic Securities) on the London Stock Exchange


Islamic investment certificates (sukuk) have raised over US$51 billion on the London Stock Exchange (LSE). Listing on an authorised exchange (LSE or other) is required for sukuk to receive regulatory and tax treatment without which they could not compete economically with conventional bonds. Like all securities marketed to the public sukuk are subject to Listing and Prospectus Rules under the Financial Services and Markets Act 2000 and secondary legislation. This article identifies the requirements under the Prospectus Rules as they apply to sukuk and highlights a distinctive issue that arises in the drafting and regulatory screening of a sukuk prospectus.

 Dr Scott Morrison

Senior Lecturer, School of Law Middlesex University (London)



Sukuk[1] are widely viewed as the most successful global instrument in Islamic finance. The City of London and the British government have actively competed with other financial centres or jurisdictions[2] to attract sukuk to list on the LSE. A structured product and a product of securitisation sukuk contain one or more financial or commercial contracts, each of which must comply with Islamic law.[3] This article will claim that the twin demands of Islamic legality and of disclosure under the UK Prospectus Rules creates a distinctive challenge in drafting a sukuk prospectus, and making a determination as to whether the Propsectus Rules are satisfied.


The Regulatory and Tax Treatment of Sukuk in the United Kingdom

The regulatory approach to sukuk (as with other Islamic financial services and products) is to treat them in approximately the same way as similar instruments that do not purport Islamic legal compliance;[4] the relevant similarity between the Islamic and the conventional structure is that of their respective economic functions. The types of sukuk regulated in the UK represent only a subset of possible sukuk — those based in or characterised as debt, not equity.[5] The regulatory comparator is therefore the bond (or gilt). At the same time having regard to this narrow subset the government has made several notable legislative changes without which sukuk would be uncompetitive. For example with regard to the ijara (lease-based) sukuk deployed in the sovereign issue tax reliefs were granted; without these the Stamp Duty Land Tax (SDLT) attracted by the sale, leaseback, and re-purchase of real property would have been wholly uneconomic.[6] Sukuk have been little tested by the courts.[7]

The treatment of bonds and sukuk remains asymmetric in one respect. In order to be a viable investment sukuk (but not conventional bonds) must qualify as an Alternative Finance Investment Bond (AFIB).[8] In order to do so they must be listed on a recognised stock exchange.[9] In order to be admitted to such an exchange the sukuk issuer must supply the Financial Conduct Authority (FCA) with a prospectus which the FCA deems to be in compliance with the Prospectus Rules.


Prospectus Rules and Sukuk

In the light of the previous section it is clear that sukuk must be issued by a public company, in order that they may be admitted to, listed and traded[10] on a recognised exchange. In addition to the usual benefits of listing on a well-known, highly reputed exchange[11] (such as access to a large market and volumes of liquidity), the further scrutiny to which listed securities are subjected prior to admission enhances the credibility of what remains a relatively novel security. Together with the sovereign sukuk the successful (cross-) listing of a significant number of sukuk on the LSE[12] has boosted familiarity and bolstered investor confidence, as evidenced by excess demand — even at modest prices.

The Listing Rules for sukuk are identical to those for any other security.[13] The Prospectus Rules for sukuk are also identical to those for any other security. However a matter unique to sukuk arises with the application of the Prospectus Rules. This section sets out the Prospectus Rules[14], and International Organisation of Securities Commissions (IOSCO) and AAOIFI guidance on the contents of prospectuses in order to ascertain the unique drafting and regulatory challenge that sukuk present.

A prospectus is marketing material for the sale of a security. The Prospectus Rules engage when an offer of a security is made to the public or an application is made for a security to be admitted to list/trade.[15] A prospectus must only be approved if it ‘contains the necessary information’[16], with the necessary information defined as ‘the information necessary to enable investors to make an informed assessment’.[17] The necessary information must also ‘be prepared having regard to the particular nature of the transferable securities and the issuer’.[18] The Prospectus Rules create a minimum threshold of disclosure. The Prospectus Rules also address the accessibility and clarity of the supplied information; the prospectus must provide the information ‘in a form which is comprehensible and easy to analyse.’[19] Arguably a product such as a sukuk is less well known and therefore may require more explanation than one that is already more familiar to investors, such as a corporate bond.

AAOIFI standards[20] in large measure re-state the matters that a prospectus approved by the FCA would include. In an indicative list: the participants in the issue and their legal position, respective obligations (of trustee, paying and other agents, issuing manager — and termination/dismissal from these roles)[21], and internally consistent contractual terms.[22] However the AAOIFI standard also adds provisions specific to sukuk: identifying the nominate contract type,[23] and an express obligation to ‘abide by the rules and principles of the Islamic Shari’a,’ and certification ‘that there is a Shari’a board that approves the procedures’.[24] A principle of Islamic finance is that profit and loss sharing is a key aspect of investment, with the implication that there can be no gain or realisation of profit without exposure to risk.[25] In the context of sukuk this principle gains traction with the array of possible credit enhancements, capital and other guarantees and (re-purchase) undertakings.[26] AAOIFI r 5/1/8/7 expressly excludes an issuer guarantee to compensate sukuk holders for the nominal value of the certificates, with the exception of torts and negligence. It also excludes a guarantee of ‘a fixed percentage of profit.’[27]

Scrutinising the offering circular or prospectus of recent exemplary sukuk[28], each lists the underlying nominate contract (in Arabic) and more than one Shariah Board.[29] Each also contains disclaimers to the effect that other Shariah Boards may or may not deem the envisaged transactions compliant with Islamic law and that therefore investors should seek independent advice.[30] This is the extent of the information provided regarding compliance with Islamic law. It is evident that this has satisfied issuers and investors.[31] However, arguably stating approval of a Shari’a Board but then referring the investor to their own shari’a advisers implies that all necessary information regarding compliance with Islamic law is not included in the prospectus. On the assumption that one (although certainly not the only) reason investors consider purchasing an investment compliant with Islamic law is precisely because of that compliance, it may be queried (even making allowances for the defensive drafting of a prospectus) whether existing shari’a compliance clauses in sukuk prospectuses actually satisfy the Prospectus Rules.


In English law an opinion or a judgment contains reasoning reliant on authorities (whether statutory, case law, or a variety of persuasive legal materials) and arguments. The purpose of these is to support the conclusion. The conclusion (that is, the holding of the court or judge) may for example be that a given transaction is lawful and therefore enforceable and that such and such remedies are ordered to enforce it. A comparable process of reasoning, argument and reliance on authority occurs under Islamic law.[32] Like an English judgment an Islamic legal opinion is not reducible to its holding. However with regard to Islamic law, as illustrated in the previous section, only the holding — not the reasoning — is reported in the prospectus. The principal conclusion of this article is that the reasoning and the authorities regarding Islamic law are (at least presumptively) material to investors seeking to comply with Islamic law and that therefore they should be included in the prospectus.

The drafting of a prospectus (whether sukuk or other) requires several simultaneous balancing exercises. First, the balance between concision and completeness. Second, the balance between simplicity and accuracy; accuracy may require a technical explanation and jargon. Existing sukuk prospectuses have evidently struck a balance adequate to satisfy the FCA. However there is considerable scope remaining for more than a purely formal affirmation of shari’a compliance, such as that exhibited by the surveyed LSE listed sukuk. To put the point more strongly prospectuses that do not provide the Islamic legal basis could be deemed breaches of both persuasive and binding rules regarding the content of a prospectus listed on a UK recognised exchange.

The significance of inadequate compliance or of non-compliance with the Prospectus Rules is that it increases shari’a non-compliance risk; this is a species of risk that has materialised in the past in connection with sukuk, most consequentially in 2007.[33] Incomplete or otherwise inadequate shari’a compliance clauses in a sukuk prospectus may also give rise in the courts to ultra vires attacks (or defences) by investors or issuers of sukuk. In order for all risks to be factored into market and pricing calculations all risks must first be recognised. However the risk attendant to prospectuses that fall short of the standard set by the UK Prospectus Rules has not previously been noted or analysed. Furthermore recognition and to the extent possible mitigation of risks including the risk of shari’a non-compliance is necessary for the achievement and maintenance of market integrity and investor protection; in other words, those values embodied by both the Listing Rules and the Prospectus Rules to which sukuk (as AFIBs) are subject.

Fortunately in keeping with larger developments in the Islamic finance and banking industry in the United Kingdom and the English case law, the addition necessary to supplement sukuk prospectuses may be little more than judicious reference to AAOIFI, IFSB or to the published guidance of similar organisations:[34] the very kind of material that Beximco[35] suggests parties to an Islamic finance transaction must contractually incorporate should they desire an English court to enforce an Islamic financial contract, which the court will do by means of the application of English contract law to the rules and principles so incorporated.


[1] The plural form in Arabic (the singular is sakk) which will be used hereinafter, as is industry practice. The most authoritative definition is that sukuk are: ‘certificates of equal value representing undivided shares in ownership of tangible assets, usufruct and services or (in the ownership of) the assets of particular projects of special investment activity.’ This definition was first issued in 2003, and most recently published in official form in 2010; para 2, Accounting and Auditing Organisation of Islamic Financial Institutions (AAOIFI), Shari’ah Standard 17 on ‘Investment Sukuk’, 303-324 at 307. Para 2 notes that the reason for retaining the term ‘sukuk’ is to distinguish these certificates from shares and bonds. That standard was amended by AAOIFI Shari’ah Resolutions: Issues On Sukuk (February 2008), available at; this publications was triggered by the well-known intervention of the Pakistani jurist and then chair of the AAOIFI Shari’a Council, Judge Muhammad Taqi Usmani who criticised existing market practices. His critique was published as Sukuk and Their Contemporary Applications (Manama, Bahrain: AAOIFI Shari’ah Council, 2008), available at

[2] These jurisdictions are catalogued and analysed in Scott Morrison, ‘Debut Sovereign Sukuk in 2014,’ Journal of International Banking Law and Regulation (London: Sweet and Maxwell), Vol 30 Issue 3 (2015), 122-127. Luxembourg, Hong Kong and South Africa each completed sovereign sukuk that year. The most recent statement of the intent to compete for title as leading western centre for Islamic finance by TheCityUK (November 2015) is available for download at: Among the claims made there are that Islamic financial institutions (IFIs) in the country hold $4.5bn (at end 2014), and that there are over 15 banks with Islamic windows, with 5 stand alone Islamic banks; this is double the number of Islamic banks in the US. A history of Islamic banking in Britain may be found in Rodney Wilson, ‘Islamic Banking in the United Kingdom’ in M. Fahim Khan and Mario Porzio, eds, Islamic Banking in Europe (Edward Elgar, Cheltenham, 2010), 212-221.

[3] AAOIFI lists 9 of these contracts (16 if sub-types are counted) — Shari’ah Standard 17 as at note 1.

[4] HM Revenue and Customs, ‘Stamp duty land tax: Commercial sukuk’ (26 June 2008) at 3.5: ‘The Government measures enable sukuk to be held, issued, and traded in the same way as corporate bonds.’ Additional consequential policy analysis at HM Treasury and the Financial Services Agency (as it then was), ‘Consultation on the legislative framework for the regulation of alternative finance investment bonds (sukuk)’ (December 2008) at 3.10.

[5] As Peter Casey (formerly Director and Policy Head of Islamic Finance at the Dubai International Financial Centre, DIFC) puts the point ‘This debenture-like character is by no means inherent in the concept of Sukūk. Indeed, many practitioners argue that it is unfortunate, and that Islamic finance should, at its best, be offering instruments with different patterns of risks and returns from those which dominate the conventional markets. It is thus possible that future instruments issued under the name of Sukūk will not be designed to mimic conventional debentures, or indeed any other standard conventional instrument.’ ‘Emerging Issues for Inadequate Disclosure Requirements for Islamic Capital Market Products,’ in IFSB, OICV-IOSCO, and Securities Commission Malaysia, Disclosure Requirements for Islamic Capital Market Products (2013) 31-42 at 33.

[6] Regarding tax effects of ijara sukuk: HM Revenue and Customs, ‘Stamp duty land tax: Commercial sukuk’ (June 26, 2008). In addition without a legislative change sukuk would fall to be regulated as Collective Investment Schemes (CIS). However, in order to ensure regulatory parity with a bond, the government exempted sukuk from CIS classification — s 3 FSMA 2000 (Regulated Activities) (Amendments) (No. 3) Order 2009 amending FSMA 2000 (Collective Investment Schemes) Order 2001 (S.I. 2001/1062). Sukuk are classified as Alternative Finance Investment Bonds (AFIB); see s 77 FSMA 2000 (Regulated Activities) Order 2001 (S.I. 2001/544). For the policy analysis that culminated in these statutory instruments: HM Treasury and the UK Debt Management Office, ‘Government sterling sukuk issuance: a consultation’ (November 2007). The UK sovereign, AFIB status and attendant tax and regulatory developments are analysed in Scott Morrison, ‘The Upcoming UK Sovereign Sukuk Issue,’ Journal of International Banking Law and Regulation (London: Sweet and Maxwell), Vol 29 Issue 7 (2014), 362-366.

[7] There are only a handful of cases dealing with Islamic banking and finance in the UK. The most important which states the current position in relation to Islamic law in financial contracts is Beximco Pharmaceuticals Ltd and Ors v Shamil Bank of Bahrain EC [2004] WLR 1784, [2004] EWCA Civ 19, [2004] 1 WLR 1784. In Beximco the Court of Appeal held that the court will not apply a choice of law clause specifying Islamic law. The reason is that Islamic law is not national law and Rome I only applies to national law [para 48]. Therefore any elements of Islamic law must be expressly incorporated as contractual terms. The court will then apply the principles of English contract law to the construction and enforcement of these terms. The Islamic finance community both inside and outside of Britain welcomed Beximco — Dominic Sellwood, ‘Islamic Contracts in a Modern Legal Context’ in Humayon A. Dar and Umar F. Moghul, eds, The Chancellor Guide to the Legal and Shari’a Aspects of Islamic Finance (Chancellor Publications London 2009), 25-56 at 38 with further discussion of the English case law at 36-39. Additional reflections on the implications of Beximco and Islamic Investment Company of the Gulf (Bahamas) Ltd v Symphony Gems NV & Ors unreported 2002 WL 346969, [2002] All ER (D) 171 (Feb) (QBD: Comm Ct) is furnished by: Nicholas HD Foster, ‘Encounters between legal systems: recent cases concerning Islamic commercial law in secular courts,’ in Amicus Curiae Issue 68 November/December 2006; Rupert Reed, ‘The application of Islamic finance principles under English and DIFC law’ in Butterworths Journal of International Banking and Financial Law, October 2014 573-577, and Rodney Wilson, Legal Regulatory and Governance Issues in Islamic finance (Edinburgh, Edinburgh University Press 2012), 32-35.

[8] Financial Services and Markets Act 2000 (Regulated Activities) (Amendments) Order 2010 no. 86. It cross references Directive 2001/34 on the admission of securities to listings, [2001] OJ L184/1 and article 4.1(14) of Directive 2004/39 amending Council Directives 85/611 and 93/6 and Directive 2000/12 of the European Parliament and of the Council.

[9] s 77A Financial Services and Markets Act 2000 (Regulated Activities) (Amendments) Order 2010 no. 86; s 77A(2)f allows listing on either an official list or trading on a regulated market, cross referencing Directives 2001/34/EC and article 4.1(14) of Directive 2004/39/EC, and recognised investment exchanges within the meaning of s 285 FSMA 2000. HM Treasury and FSA, ‘Legislative framework for the regulation of alternative finance investment bonds (sukuk): summary of responses’ (October 2009), at 2.24. HM Treasury (at 2.31) justifies the listing requirement as: one that is non-discriminatory under the larger European Economic Area (EEA), one that furthers the objective of the European Union’s Financial Services Action Plan, and one that prevents regulatory arbitrage — by means of which issuers might seek to evade regulation as a Collective Investment Scheme (CIS) or avail of other tax or regulatory exemptions improperly.

[10] Due to Islamic legal strictures the secondary market for sukuk remains modest and comparatively inactive. The stringency of the strictures depends upon the nominate contract type. Fully tradable sukuk are only those representing tangible assets or an ownership interest in a business or an investment portfolio; those sukuk containing receivables are not tradable — see M Kabir Hassan, Rasem N Kayed, Umar A Olsen, Introduction to Islamic Banking and Finance (Pearson Essex 2013). On the buy and hold sukuk market: Rahail Ali, ‘Legal Certainty for Sukuk’ in Abdulkader Thomas, ed, Sukuk, Islamic Capital Markets Series (Securities Commission Malaysia and Sweet and Maxwell Asia, Petaling Jaya, Selangor, 2009) 93-106 at 104.

[11] The LSE has published an abundance of promotional material on this advantage. For example regarding structured products, which would encompass sukuk: LSE ‘Factsheet’, Concerning several markets where sukuk are listed including the LSE, and the formalities in application for admission thereto: Mustafa Shah, ‘Sukuk listing on Dubai, Luxembourg and London Financial Markets’ in Sohail Jaffer ed., Global Growth, Opportunities and Challenges in the Sukuk Market (Euromoney, London 2011) 164-176.

[12] 57, according to the LSE:

[13] s 73(2) FSMA 2000 delegates the power to make listing rules to the FCA. In doing so the FCA acts as UK Listing Authority (UKLA) [s 73A(1) FSMA 2000]. The Listing Rules impose obligations on the issuer, taking the form of six broad principles. These principles concern directors’ obligations; procedures, systems and controls; integrity; creation of true markets; equal treatment of shareholders holding the same class of shares; and dealings with UKLA. For an analysis see Alistair Hudson, Securities Law (Sweet and Maxwell, 2nd edition, London, 2013), 12-21 through 12-33.

[14] Which are set out in the s 87A FSMA 2000. Additional EU sources of the Prospectus Rules is the Prospectus Directive 2003 as implemented by the Prospectus Regulations 2005. FCA Handbook PR 2.1 is pertinent guidance For discussion see Alistair Hudson, Securities Law (Sweet and Maxwell, 2nd edition, London, 2013), p 254, and chapter 9 generally on the prospectus.

[15] s 85 FSMA 2000

[16] s 87A(1)b FSMA 2000

[17] s 87A(2)a FSMA 2000: ‘assets and liabilities, financial position, profits and losses, and prospectus of the issuer’

[18] s 87A(4) FSMA 2000; s 87A(6) sets out requirement of a summary of the prospectus which ‘must, briefly and in non-technical language, convey the essential characteristics of, and risks associated with, the issuer, any guarantor and the transferable securities to which the prospectus relates’

[19] s 87A(3) FSMA 2000.

[20] Shari’ah Standard 17 on ‘Investment Sukuk’ 303-324, at 313-314, r 5/1/8. Noureddine Krichene re-states the AAOIFI guidance in Islamic Capital Markets: theory and practice (John Wiley and Sons, Singapore Pte Ltd 2013), p 652. Other international standards and best practices not specific to sukuk are also relevant, such as IOSCO principle 16 on the disclosure ‘of financial results, risk and other information that is material to investors’ decisions’ — cited in Peter Casey, ‘Emerging Issues for Inadequate Disclosure Requirements for Islamic Capital Market Products’ chapter 2 in IFSB, OICV-IOSCO ‘Disclosure Requirements for Islamic Capital Market Products’ Securities Commission Malaysia (2013), 31-42 at 37. Discussion of IOSCO standards for sukuk by the Islamic Financial Services Board (IFSB) available from Abdullah Haron, ‘Regulatory framework for sukuk’ in Sohail Jaffer ed, Global Growth, Opportunities and Challenges in the Sukuk Market (Euromoney, London 2011) 187-198 at 192-193.

[21] Shari’ah Standard r 5/1/8/1

[22] Shari’ah Standard r 5/1/8/1 and r 5/1/8/3

[23] Shari’ah Standard r 5/1/8/2 stipulates that a sukuk prospectus must identify the nominate contract: ijara, murabaha, istisna’, salam, mudaraba, musharaka, wakala, muzara’a, mugharasa or musaqa’.

[24] Shari’ah Standard r 5/1/8/4 at p 313; continuing at p 314: ‘of the issues and monitors the implementation of the project throughout its duration.’ R 5/1/8/5 stipulates that the prospectus must affirm that invested funds ‘and the assets into which the funds are converted will be undertaken through Shari’a-compliant modes of investment.’

[25] The payment of interest on a bank account is the clearest, simplest instance of a breach of this principle. The principle itself is so ubiquitous as to render citation of authorities superfluous.

[26] For a comparative look at the purchase undertaking: Andrew Coats and Habib Motani, ‘Purchase Undertakings in Recent Sukuk Issuances: Different Objectives and Approaches’ in S. Nazim Ali, ed., Islamic Finance: innovation and authenticity (Boston, MA, Islamic Finance Project, Harvard University, 2010) 193-212.

[27] Shari’ah Standard 17. This paragraph then creates exceptions to these prohibitory statements stipulating that: 1) a third party may provide a guarantee gratis and 2) the issuer may ‘offer some tangible or personal guarantees with respect to its wrongful acts or negligence’.

[28] Offering circular of the debut UK sovereign sukuk is available at: The base prospectus of the Khadrawy Limited Sukuk (closed 31 March 2015, over US$900 m, ten-year tenor, 2.471 pc), issued by HM Secretary of State acting by the Export Credits Guarantee Department is available at:

[29] although they do not expressly state (and impliedly state the contrary) as per AAOIFI rule 5/1/8/4 that the involvement of the Shari’ah Board will continue post-closing; at pages 3, 8 and 46 of the UK sovereign and at page 24 of the Khadrawy sukuk. In the latter case approval was not stated but rather the expectation of approval.

[30] pages 8 and 46 of the UK sovereign; p 24 of Khadrawy. An early sukuk, listed in 2008 (Tabreed Financing Corporation) contains similar language suggesting (although not demonstrating in the absence of an examination of all LSE prospectuses) a degree of continuity regarding the Islamic legal compliance clause: However the first LSE listed sukuk (Tabreed 06 Financing Corporation), issued two years earlier in 2006, does not. A sampling of others considered are KT Turkey Sukuk Limited and ADIB Capital Investment 1 Ltd, both of which pre-date and are essentially expressed in the same terms as the UK sovereign and Khadrawy sukuk.

[31] Although comparative research into prospectuses on exchanges in other jurisdictions would be necessary to reveal whether more extensive information acts as an attraction (or a hindrance) to listing on those exchanges that compete with the LSE.

[32] Wael B. Hallaq, ‘The Logic of Legal Reasoning in Islamic Law and the Common Law: Logic and Method’ 34 Cleveland State Law Review (1985-1986), 79-96; John Makdisi, ‘Hard Cases and Human Judgment in Islamic and Common Law’, Indiana International and Comparative Law Review Issue 2 (1991-1992), 191-219. See also the author’s webpage/blog, ‘UK Islamic Finance Law’ on the comparison of common law and English law at

[33] As a consequence of Judge Usmani’s statements published as Sukuk and Their Contemporary Applications referenced at note 1. Those even tangentially involved in this industry will recall the market implications of that intervention.

[34] IFSB is the Islamic Financial Services Board, the Kuala Lumpur based organisation that is the counterpart to the Arab Gulf’s AAOIFI. Without commenting on the respective merits of the Islamic legal interpretations of these two bodies, one advantage the IFSB standards possess is that they are all readily available online at the organisation’s webpage ( whereas AAOIFI is irregularly available in printed form only, and less frequently updated. The Fiqh Academy of the Organisation of the Islamic Cooperation (OIC) would be a further alterative although another with difficult accessibility and less concentration on finance.

[35] As explicated at note 5.

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