Sukuk
Sukuk are certificates representing undivided ownership interests in assets, usufructs, services or ventures, with returns paid from what those underlying interests generate. "Islamic bond" is useful shorthand but not an accurate legal description.
Also called: sukuk · Islamic bonds · sakk · Islamic certificates
A conventional bond is a debt: the issuer owes the holder principal and interest. A sukuk certificate is meant to represent ownership of something — a leased asset, a partnership, a portfolio of receivables that can be traded — and the return comes from that thing. The structure is named after the contract used: ijarah sukuk, mudarabah sukuk, musharakah sukuk, wakalah sukuk, and so on. Governments, banks and companies across the Gulf, Malaysia, Turkey and elsewhere issue them, and they are listed in London, Dublin and other markets.
Most issues are asset-based, not asset-backed. Holders have a beneficial interest in the assets but, in practice, their recourse in a default is often to the originator's promise to buy the assets back, which makes credit risk look much like a bond's. In 2008 AAOIFI issued guidance criticising structures that guaranteed holders their capital through repurchase at face value.
In practice
Not every sukuk is legally identical to a bond, and not every sukuk gives holders real recourse to the underlying assets. The structure, the governing law and the purchase undertaking decide what a holder actually owns.
Example
A government sells a portfolio of buildings worth US$500 million to a special-purpose vehicle, which issues US$500 million of ijarah sukuk and leases the buildings back to the government. The rent pays the periodic distributions; at maturity the government buys the buildings back for US$500 million under a purchase undertaking.
Commonly confused with
| Term | How it differs |
|---|---|
| Bond | A bond is a debt claim on the issuer. A sukuk is an ownership claim on an asset or venture, even if its economics are engineered to resemble a bond. |
See also
- IjarahIjarah is an Islamic lease: the owner of an asset transfers the right to use it for an agreed period in return for rent, while keeping ownership and the risks that come with ownership.
- MudarabahMudarabah is an investment partnership in which one party provides the capital and the other provides the management. Profit is shared at an agreed ratio; financial loss falls on the capital provider unless the manager was negligent or in breach.
- MusharakahMusharakah is a partnership in which each party contributes capital to a venture. Profit is shared at an agreed ratio, while losses are borne in proportion to each partner's capital contribution.
- WakalahWakalah is an agency contract in which one party, the principal, appoints another, the agent or wakil, to act on its behalf — buying, selling, investing or managing — usually for a fee.
- TokenizationTokenization means representing an asset, or a claim on one, as a transferable token recorded on a ledger. The token is a record of entitlement; whether legal ownership of the underlying asset moves with it depends on the contract and the governing law, not on the ledger.