Subordinated sukuk constitute a category of sukuk (sukuk structure) in which sukuk certificates give sukuk holders a residual claim over the assets financed by the funds mobilized through these sukuk. The sukuk-holders’ claim ranks after the claims of other creditors and unrestricted investment accounts (broadly, quasi-equity). Classified in terms of priority upon liquidation or bankruptcy, this type of sukuk are used by Islamic banks and financial institutions, being the issuers, to strengthen their Tier 2 capital.
However, and as opposed to definition of subordination in conventional finance, subordinated sukuk do not represent creditor claims that rank after those of other creditors. Ranking under conventional subordination renders an instrument non-compliant with with Shari’ah principles and rules.
Structuring sukuk and any other instrument as part of multiple securitized tranches to cater to different levels of creditworthiness is commonly used in conventional finance (in the so-called securitization). However, such practices cannot be used or cherished for sukuk structuring due to the certain Shari’ah requirements, particularly equal treatment of all investors (providers of funds).
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