Sovereign sukuk in default

Sovereign governments are increasingly turning to sukuk (sharia-compliant investment certificates) to meet their growing financing needs. However, the potential treatment of sukuk during a sovereign debt default remains a black box. This article addresses that gap through a detailed examination of the terms of recently issued sovereign sukuk, as well as other legal, commercial, and academic sources that shed light on the instruments’ status vis-à-vis conventional bonds. We conclude that sukuk enable—but do not entitle—their holders to recover more from a sovereign debt default than traditional bondholders. This potential for asymmetric treatment does not stem from any clear de jure seniority of sukuk over bonds. Both instruments create unsecured claims and include largely similar contractual provisions regarding defaults and restructurings. Nevertheless, the rights of each group leave significant room for different de facto outcomes. For example, market conditions may incentivize governments to treat sukuk favourably or empower sukuk-holders to coordinate successful enforcement or holdout measures. Looking forward, potential changes to the standard terms of sukuk, driven by efforts to enhance their consistency with Islamic law, may give their investors more concrete legal advantages over bondholders.