SUKUKBAY.COM

Islamic Finance creating wealth through trading in real assets, investments and partnership

Sukuks

Introduction

Sukuk is plural, sakk is singular.

 

The capital market comprises the stock market and the bond market to raise funds. The bond market which is directly tied to interest payment is prohibited in Islam. Bond securities enable an investor to assure some income, Sukuk is an Islamic investment meeting a similar need.

 

Securities which pay interest (riba),  predetermined return or loans that are sold below their nominal value are prohibited.

 

Sukuks or Islamic bonds are instruments that registered in the name of the holders linked to an underlying asset whether tangible or intangible. Holding of Sukuks represents partial ownership in the assets. Sukuks are neither shares or bonds but represent an element of each.  

 

Profit (income) from sukuks is calculated according to the performance of underlying assets or projects. With Sukuks the investor participates in both gains and losses

Sukuk Issuance Process

The company or sovereign body approaches the bank with a Shariah compliant project to arrange financing.

 

The investment bank defines the general framework and organisational structure, together with legal and procedural details all incorporated in the subscription prospectus.

 

Generally requires the creation of a Special Purpose Vehicle (SPV) providing the entity for asset acquisition for or on behalf of the sukuk investors. It is a restricted independent entity domiciled in a tax-efficient jurisdiction.  The SPV acts as a trustee for all the activities for investors with respect to registration, distributions and redemptions.

 

The underwriter bank underwrites the subscription.

 

The sukuk may or may not be listed on the exchange.

These are:

· Mudaraba sukuk - the SPV is Rab-al-Mal(investor) on behalf of investors with an appointed Mudarib (manager).

· Musharaka sukuk - based on partnership process, the SPV on behalf of the sukuk holders is a partner providing capital and musharik (obligor/ other partner) provides some asset .e.g. land.

 

· Ijara sukuk - SPV acting on behalf of the investors, effectively representing ownership in an asset (property or equipment) and deriving rental from the asset.

 

· Salam sukuk - the SPV on behalf investors pays in advance for the goods/asset, delivered and sold on maturity at predetermined price.

 

· Istisna sukuk - a project is financed and transacted before it’s completion.

Different Types of Sukuks