FAQ: What actually is a Sukuk?

When finding a name for our crowdfunding platform SUKUUK, we were inspired by the Islamic finance term "Sukuk." A Sukuk (according to the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) "Investment Sukuk certificate") is the counterpart of conventional bonds. However, bonds are interest-bearing securities and offer investors, in addition to the right to repayment of their invested capital, a right to interest payments as well. Therefore, Sukuk is not an exact replica of conventional securities because interest is against the principles of Islamic finance. With Sukuk, investors are also entitled to the repayment of their investment, but the profits are not guaranteed interest but earned income instead.

Accordingly, Sukuk are Islamic bonds in which investors meet companies or banks with capital requirements, making the Sukuk market one of the fast-growing Islamic financial markets. The establishment of Sukuk as a secondary market instrument allows for great potentials with noteworthy developments in this area. In particular, the Sukuk market in Malaysia is currently one of the most important financial markets in the world. Indeed, a Sukuk can be interesting for portfolio design and asset diversification, not only for larger investors but also for individual private investors in the sub-segment. 

Features of a Sukuk

According to the AAOIFI, Sukuk can be defined as follows: "Sukuk are certificates of equal value representing a legal title to ownership of portions of tangible assets, usufruct and services, or (to ownership of) the assets of individual projects or specific investment activities." The structure of a Sukuk as a securitized asset is broadly similar to a conventional asset-backed security (ABS). However, the Sukuk does not allow the securitization of pure cash flows. The participants in a Sukuk transaction generally include the following: 

• Organizer/Initiator: Sells their own assets to a special purpose vehicle (SPV).

• Special Purpose Vehicle: The bankruptcy-backed SPV purchases the originator's assets and receives the purchase price through the Sukuk issuance.

• Investment banks: Make Sukuk securities available to the market. Among other things, they are responsible for structuring, developing, accepting, and marketing these securities.

• Investors: The main acquirers here are central banks, Islamic banks, and other financial institutions.

Features of Islam-compliant banking instruments

Source: Ebert, H./Thießen, F. et al., 2010, p. 252.

You can learn more about Sukuk and about Islamic banking and finance in the book “Islamic banking and Islamic finance” by Dietmar Ernst, Bilgehan Akbiyik, and Ali Srour.

Source: Islamic banking und Islamic finance, 2nd edition, Dietmar Ernst, Bilgehan Akbiyik, Ali Srour.

#Sukuk #Bond #AAOIFI #Sharia