SUKUK

What is Sukuk?

The term "Sukuk" is the plural of "Sakk", which means "certificate" in Arabic. Sukuk are essentially certificates that represent partial ownership of an asset. Unlike conventional bonds, Sukuk are Sharia compliant, meaning they comply with Islamic principles that prohibit interest ( riba ) and uncertain transactions ( gharar ).

Sukuk are issued by various entities, including governments, corporations and financial institutions, to raise funds. They are structured to allow investors to receive a stream of Shariah-compliant income, usually in the form of rental income or profit sharing.


How Does Sukuk Work?

Sukuk operate under a partnership model. The Sukuk issuer creates a special entity, generally called a "project entity", which holds the underlying assets. Investors purchase Sukuk, which gives them rights to a portion of the project entity's assets. In return, investors receive sharia-compliant payments based on the income generated by these assets.

There are several Sukuk structures, including:

  • Sukuk Ijara: These Sukuk are based on a leasing model. The issuer sells an asset to the project entity, which then leases it back to the issuer in exchange for lease payments. Investors receive a share of Shariah-compliant rental payments.
  • Sukuk Musharaka: These Sukuk are based on a partnership model. Investors and the issuer engage in a joint venture for a specific project. Profits and losses are shared according to pre-established agreements.
  • Sukuk Mudaraba: These Sukuk are based on a fund management model. The issuer acts as manager of the funds, while investors provide the capital. Profits are shared according to the terms of the contract.
  • Sukuk Wakala: These Sukuk are based on a portfolio management model. The issuer acts as a portfolio manager, investing the funds in accordance with specific criteria. Investors receive a share of the profits generated.

Importance of Sukuk in Islamic Finance

Sukuk play an essential role in the world of Islamic finance. They allow investors to participate in financial transactions while respecting Sharia principles. This expands investment opportunities for Muslims, who can ethically diversify their portfolio.

Sukuk have also become a key tool for governments and companies seeking to raise funds in Islamic markets. They opened the door to new sources of financing while respecting the ethical standards of Sharia law.


The Different Types of Sukuk

There are a variety of Sukuk available in the market, each tailored to specific needs. Common types include:

  • Sovereign Sukuk: Issued by national governments to finance infrastructure projects or to meet other public financing needs.
  • Corporate Sukuk: Issued by companies to finance projects or for corporate financing needs.
  • Foreign Sovereign Sukuk: Issued by foreign governments seeking to attract Islamic investors.
  • Municipal Sukuk: Issued by local authorities to finance projects at the municipal level.
  • Infrastructure Sukuk: Specifically issued to finance infrastructure projects such as roads, bridges and airports.

Difference between Sukuk and Bonds

1 Nature of the instrument:
  • Sukuk: Sukuk are Sharia-compliant certificates of partial ownership of underlying assets. Investors own a share of these assets and receive sharia-compliant income, such as rental income or a share of profits.
  • Bonds: Bonds are debt securities. The bond issuer borrows money from investors and promises to repay the principal with interest at a specified future date.
2 Nature of performance:
  • Sukuk: Sukuk offer returns based on Shariah-compliant transactions, such as rental income or a share of profits. They do not generate interest ( riba ).
  • Bonds: Bonds earn fixed or variable interest depending on the agreed interest rate. The interests are considered non-Sharia compliant.
3 Ownership structure:
  • Sukuk: Investors own a portion of the underlying assets, meaning they share in the risks and rewards associated with those assets.
  • Bonds: Investors hold a claim on the issuer and have no rights to the issuer's assets. They do not share the risks associated with the issuer's assets.
4 Duration and maturity:
  • Sukuk: Sukuk generally have varying maturities depending on the structure of the instrument. They can have short, medium or long maturities.
  • Bonds: Bonds have predefined maturities, usually short, medium or long term. Interest payments and principal repayment are clearly specified.
5 Security and guarantees:
  • Sukuk: Sukuk are generally backed by underlying assets. Investors have a partial guarantee based on these assets.
  • Bonds: Bonds are generally guaranteed by the creditworthiness of the issuer. They are not necessarily backed by specific assets.
6 Fund management:
  • Sukuk: Sukuk may involve partnerships and fund management structures, where investors and the issuer share profits and losses in accordance with pre-established agreements.
  • Bonds: Bonds do not involve profit or loss sharing. Investors receive fixed or variable interest payments, regardless of the issuer's performance.


In summary, Sukuk and bonds differ fundamentally in their nature, structure, yield and Shariah compliance. Sukuk are Shariah compliant and are based on Shariah compliant transactions, while bonds are conventional debt securities with interest payments. Sukuk offer an ethical alternative for raising funds on financial markets while respecting Islamic principles.