How does a sukuk work?

How does a sukuk work?

Sukuk (Islamic bond or “Sharia-compliant” bond) is an Islamic financial certificate that represents a portion of ownership in a portfolio of eligible existing or future assets. Then, the issuer uses the proceeds from the certificates to purchase the asset, and investors receive partial ownership of the asset.

What is sukuk in simple words?

A sukuk is an Islamic financial certificate, similar to a bond in Western finance, that complies with Islamic religious law commonly known as Sharia. The issuer must also make a contractual promise to buy back the bond at a future date at par value.

What is the difference between sukuk and bonds?

Sukuk are Sharia-compliant financial certificates through which investors gain partial ownership on an issuer’s assets until maturity. While Bonds are financial certificates through which investors lend money to the issuer, indicating an obligation for repayment at maturity.

What are the benefits of sukuk?

Sukuk can play an important part in the development of an Islamic market and banking system. The main advantage of sukuk is to comply with Sharia while boosting the standard of living in Islamic society and developing these societies’ economies.

Why do companies issue Sukuk?

Most corporations will need to raise financing for a variety of reasons such as operation, merger & acquisition or business expansion. Bond & Sukuk provide an opportunity for corporation to raise financing without diluting the current shareholders equity.

What is a sovereign Sukuk?

Sovereign Sukuk means the instruments issued by the various governmental bodies of the State. The State shall have a direct obligation to the holders of Sukuk to pay them the amounts of such Sukuk.

Is sukuk debt or equity?

In theory, sukuk represent a form of equity as they represent certificates conferring ownership to holders of an asset or pool of assets or claim to its cash flows. In practice, they have become known as Islamic bonds with their investors holding debt.

What are sukuk, and how do they work?

A sukuk is a sharia-compliant bond-like instruments used in Islamic finance.

Sukuk involves a direct asset ownership interest,while bonds are indirect interest-bearing debt obligations.

Both sukuk and bonds provide investors with payment streams,however income derived from a sukuk cannot be speculative that would make it no longer halal.

What makes sukuk halal?

Sukuk involves asset ownership while bonds are debt obligations.

If the asset backing a sukuk appreciates then the sukuk can appreciate whereas bond yield is strictly due to its interest rate.

Assets that back sukuk are halal whereas bonds are often riba and may finance non sharia compliant businesses or fuel speculation.

What makes sukuk Shariah compliant?

In return, investors will receive periodic payments and principal investment when the sukuk matures. Sukuk are considered Shariah-compliant because they don’t involve interest payments (as conventional bonds do). Instead, the payments come from profit-sharing or rental of the assets.

What does sukuk mean?

Sukuk are defined by the AAOIFI (Accounting and Auditing Organization for Islamic Financial Institutions) as “securities of equal denomination representing individual ownership interests in a portfolio of eligible existing or future assets.”. The Fiqh academy of the OIC legitimized the use of sukuk in February 1988.