Definition
Sukuk is a financial certificate, similar to a bond, used in Islamic finance that complies with Sharia, Islamic religious laws. Unlike traditional bonds, which are debt instruments, sukuks represent ownership in an underlying asset or business venture. Returns to investors are derived from profits of the asset or venture, not interest, as charging interest is prohibited under Sharia law.
Key Takeaways
- Sukuk, also known as Islamic Bonds, are financial certificates developed as an alternative to conventional bonds which are unacceptable under Shariah law because they involve payment of interest.
- Unlike conventional bonds where the investor effectively lends money to the issuer in return for periodic interest payments and the return of principal at maturity, Sukuk represents undivided shares in the ownership of tangible assets relating to particular projects or special investment activity.
- A key characteristic of Sukuk investment is the sharing of both profit and losses, aligning with the Islamic finance principles of fairness and justice. The investor not only shares the potential profits but also bears the risk of potential losses.
Importance
Sukuk, commonly referred to as Islamic bonds, is a vital financial term because it signifies an essential instrument in Islamic finance, which is a progressively influential sector in the global financial market.
Unlike conventional bonds that involve lending money and collecting with interest, which is prohibited in Islam, Sukuk represents undivided shares of ownership in a physical asset, asset pool, business project, or investment activity.
Sukuk helps in capital generation while complying with Sharia law, giving an alternative financing and investment method to Muslims and non-Muslims who value ethical and socially responsible investments.
Thus, recognizing Sukuk is crucial in understanding diverse financial systems and contributing towards inclusive financial growth.
Explanation
Sukuk, often referred to as “Islamic bonds,” play a crucial role in Islamic finance by providing an alternative to conventional interest-based bond systems which are prohibited under Sharia law. The foundational condition of the Sukuk structure is that it must reflect an asset-based or an asset-backed form of financing, thus ensuring its adherence to Islamic principles which emphasize tangible economic activity.
Sukuk serves the purpose of financing large-scale projects, supplementing budget shortfalls, or funding infrastructure projects. This permits companies and governments to raise capital while complying with Islamic laws that prohibit earning interest.
Moreover, Sukuk promotes risk-sharing between the issuer and investor as the investor isn’t purchasing a debt rather they’re obtaining partial ownership in a tangible asset. Sukuk offers a fixed-return investment to present a regular income stream and profit sharing depending on the financial performance of the underlying asset.
As such, sukuk has evolved into a crucial financing tool in Islamic countries, which also holds international appeal among ethical investors seeking socially responsible and ethical investment opportunities. This additionally encourages Muslim populations worldwide to engage more fully in financial and economic activity, fostering social and economic development.
Examples of Sukuk
Dubai Airport Expansion: In 2013, the Dubai Airport Authority issued a $
9 billion contract that was financed by sukuk for expanding Dubai International Airport. The financing was used to add more capacity to the airport, construct a new runway, and build a specially designed Airbus A380 terminal. This is an example of how sukuk can provide significant capital for infrastructure development.
Kingdom of Saudi Arabia’s Sovereign Issuance: In 2017, the Kingdom of Saudi Arabia issued an $
5 billion international sukuk as part of its strategy to reshape the kingdom’s economy and move away from an over-reliance on oil revenues. This issuance was significant because it marked the largest emerging markets sovereign sukuk issuance at that time.
Malaysia’s Khazanah Nasional Berhad: Khazanah Nasional Berhad, the investment arm of the Malaysian government, became the first corporation to issue a Sukuk in Singapore in 2010 for its investment in integrated resorts in Singapore. This case demonstrated the flexibility of sukuk as a financing tool, showing that it can be used both by governments and by corporate entities.
Frequently Asked Questions about Sukuk
1. What is Sukuk?
Sukuk, often referred to as Islamic bonds, are financial certificates that comply with Islamic religious law, known as Sharia. Unlike traditional bonds that simply confer ownership of debt, Sukuk grants the investor a share of an asset, along with the commensurate cash flows and risks.
2. How does Sukuk differ from traditional bonds?
While traditional bonds represent a debt obligation, Sukuk represents ownership in a tangible asset or business venture. The holder of a Sukuk earns returns as profit from the asset or venture rather than traditional interest, which is prohibited under Sharia law.
3. What are the types of Sukuk?
There are several types of Sukuk, including Ijarah, Murabaha, Musharaka, and Mudaraba. Each type corresponds to a specific set of contractual agreements and specifications under Islamic law.
4. Who issues Sukuk?
Sukuk can be issued by private and public sector entities. These include corporations, governments, and financial institutions. Issuing Sukuk allows these bodies to raise capital in a way that complies with Islamic principles.
5. How can I invest in Sukuk?
Investors can generally buy Sukuk from an Islamic bank or a brokerage that offers Sharia-compliant financial products. Be mindful that investing in Sukuk, like any other type of investment, carries certain risks and it’s always recommended to seek advice from financial experts or conduct thorough research before investing.
Related Entrepreneurship Terms
- Islamic Bonds
- Asset-Backed Bonds
- Sharia Compliant Finance
- Risk Sharing
- Mudaraba (Profit Sharing)
Sources for More Information
- Investopedia: An encyclopedic resource dedicated to simplifying complex financial information and decisions.
- IslamicFinance.com: A portal specific to the theory, practice and investment structures of Islamic finance.
- Moody’s: A world-renowned financial services company, providing credit ratings, research, tools and analysis.
- Financial Times: A leading international daily newspaper that focuses on business and economic current affairs.
