Sukuk is an Islamic financial certificate that takes the same concept as bonds in Western finance. Sukuk issued must comply with Islamic religious law known as Syariah.
The structure of paying interest on bond investments in the traditional West is not allowed because it contains elements of usury so there is the issuance of sukuk which replaces the concept of bonds by selling certificates to investors and then using the proceeds of the sukuk sale to buy an asset.
Investors will own the supporting assets and the return on those supporting assets will be paid regularly over a long period of time. The issuer of the sukuk must also enter into a contractual promise to repurchase the sukuk at a future date at par value.
3 Equations of Sukuk and Conventional Bonds
Both provide investors with a steady flow of payments. Sukuk investors receive profits generated by the underlying assets on a regular basis while bond investors receive interest payments on a regular basis as well.
Bonds and sukuk are issued to investors.
Both are considered safer investments than equities.
4 Key Differences Of Sukuk And Conventional Bonds
Sukuk involves the ownership of assets while bonds are debt obligations.
If the price of the sukuk supporting asset increases, then the investor’s monthly profit also increases while the bond interest rate gain is fixed.
Sukuk-supporting assets must be Shariah-compliant while bond issuances are likely to contain elements of usury and could finance businesses that are not Shariah-compliant.
The valuation of sukuk is based on the value of their supporting assets while bond prices are largely determined by credit ratings.
There are 5 types of Sukuk:
1. Sukuk Mudharabah
Profit -sharing contracts between two parties - the investor and the Issuer. All profits will be shared based on the agreed profit sharing ratio.
However, in case of loss - all will be borne by the investor unless it is due to negligence or mismanagement of the management of the partnership, then the loss will then be borne by the Issuer.
2. Sukuk Musharakah
A partnership between two or more parties to finance a business venture. All parties contribute capital to it either in cash or in kind for the purpose of financing this endeavor.
Profits for the venture will be distributed based on the agreed profit sharing ratio. However, losses are shared based on capital contributions.
3. Sukuk Murabahah
An asset sale and purchase contract where the cost and profit margin (mark up price) are known to all parties.
4. Al-Wakalah
In general, it is a contract in which a party allows another party (usually an agent or “Wakeel”) to act on behalf of the investor based on agreed terms and conditions for as long as he or she is alive.
Here, “Wakeel” is appointed to manage the wakalah portfolio with the aim of obtaining approval on profit returns.
5. Ijarah
A contract in which the owner of the asset (lessor/lessor) agrees to lease the asset to the lessee in a lease agreement for a specified lease period.
However, the ownership of the asset is not transferred and will always remain with the lessee.
Malaysia Is The World's Largest Sukuk Issuer
If you want to know, our country is the world's largest producer of Sukuk. We controlled almost half of the world Sukuk market in 2016.
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