An Islamic financial certificate, similar to a bond in Western finance, that complies with Sharia, Islamic religious law. Because the traditional Western interest paying bond structure is not permissible, the issuer of a sukuk sells an investor group the certificate, who then rents it back to the issuer for a predetermined rental fee. The issuer also makes a contractual promise to buy back the bonds at a future date at par value.
Sukuks must be able to link the returns and cash flows of the financing to the assets purchased, or the returns generated from an asset purchased. This is because trading in debt is prohibited under Sharia. As such, financing must only be raised for identifiable assets.
Islamic bonds, structured in such a way as to generate returns to investors without infringing Islamic law (that prohibits riba or interest).
Sukuk represents undivided shares in the ownership of tangible assets relating to particular projects or special investment activity. A sukuk investor has a common share in the ownership of the assets linked to the investment although this does not represent a debt owed to the issuer of the bond
In the case of conventional bonds the issuer has a contractual obligation to pay to bond holders, on certain specified dates, interest and principal. In contrast, under a sukuk structure the sukuk holders each hold an undivided beneficial ownership in the underlying assets.
Consequently, sukuk holders are entitled to a share in the revenues generated by the Sukuk assets. The sale of sukuk relates to the sale of a proportionate share in the assets.
Since the beginning of 2000, sukuk have become important Islamic financial instruments in raising funds for long-term project financing. The first sukuk were issued by Malaysia in 2000, followed by Bahrain in 2001. Since then sukuk have been used by both the corporate sector and states for raising alternative financing. While sukuk issuance was affected by the global financial crisis, since 2011, sukuk have been growing in popularity.
Example
There are various types of sukuk structures relating to the nature of the underlying asset. The most commonly used is where the sukuk relates to a partial ownership of an asset (sukuk al-ijarah). Other types of these bonds relate to partial ownership in in a debt (sukuk murabaha), project (sukuk al-istisna), business (sukuk al-musharaka), or investment (sukuk al-istithmar).
