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What is a sukuk? – Fixed Income instrument
Shariah
Approved
Shariah Approved:
Sukuks are structured to
comply with Islamic principles.
This means they cannot
involve interest payments
(riba) and must be backed by
tangible assets or projects.
Tenure
Tenure:
Sukuks have a defined
maturity date, at which point
the principal amount is
returned to investors. The
maturity period can vary from
short-term to long-term,
similar to conventional bonds.
Asset
Backed
Asset Backed:
Unlike conventional bonds,
which represent a debt
obligation, sukuks represent
ownership in a tangible asset,
project, or investment.
Investors hold an undivided
share in these assets.
Fixed &
Variables
Returns
Fixed & Variables Returns:
Sukuks can offer fixed or
variable returns depending on
the structure and the
performance of the underlying
assets.
Profit
Sharing
Profit Sharing:
Returns on sukuks are derived
from the profit generated by
the underlying asset or
project. Investors receive a
share of the profit instead of
interest payments.
Various
Type
Various Type:
There are various types of
sukuks, such as Ijara (lease),
Musharaka (partnership),
Murabaha (cost-plus
financing), and Istisna
(construction finance), each
with its specific structure and
mechanism.
Varieties of Sukuk
Mudharabah
Al-Mudarabah
(Profit-Sharing Sukuk)
Description:
Sukuk Al-Mudarabah is based on a profit-
sharing arrangement between the capital provider (sukuk
holders) and the entrepreneur (issuer).
Explanation:
The sukuk holders provide capital to the issuer,
who manages the investment. Profits generated are shared
according to a pre-agreed ratio, while losses are borne by
the capital providers unless due to negligence by the issuer.
Musyarakah
Al-Musharakah
(Joint Venture Sukuk)
Description:
Sukuk Al-Musharakah involves a
partnership or joint venture between the sukuk
holders and the issuer.
Explanation:
The funds raised through the
sukuk are invested in a joint business venture,
and the profits and losses are shared according
to pre-agreed ratios.
Al-Wakalah
Al-Wakalah
(Agent)
Description:
Involves appointing an agent
(wakil) to manage a pool of Shariah-compliant
assets or investments on behalf of sukuk
holders.
· Explanation:
Issuer generates returns based
on the performance of underlying assets and
provide investors an agreed upon profit return.
Al-Istisna
Al-Istisna
(Construction/Manufacturing Sukuk)
Description:
Sukuk Al-Istisna is based on an
agreement to sell a specific asset that is to be
manufactured or constructed.
Explanation:
The issuer undertakes to
construct or manufacture the asset and deliver
it to the sukuk holders upon completion.
Payments may be made in stages as the
project progresses.
Murabahah
Al-Murabahah
(Cost-Plus Financing Sukuk)
Description:
Sukuk Al-Murabahah is based on
a cost-plus-profit sale agreement.
Explanation:
The issuer sells goods to the
sukuk holders at a predetermined cost-plus
profit margin. The sukuk holders receive
periodic payments based on the profit margin
agreed upon at the outset.
Al- Salam
Al-Salam
(Advance Purchase Sukuk)
Description:
Sukuk Al-Salam involves the advance
purchase of commodities or goods that will be
delivered at a future date.
Explanation:
The issuer sells the goods in advance to
the sukuk holders, who provide upfront payment.
Upon delivery, the sukuk holders may sell the goods
at the market price, potentially earning a profit.
Ijarah
Al-Ijarah
(Leasing Sukuk)
Description:
Sukuk Al-Ijarah is based on leasing
agreements where the sukuk holders own a part of
the leased asset and earn rental income from it.
Explanation:
The issuer sells the asset to the
sukuk holders, leases it back, and pays periodic
lease payments that correspond to the rental
income generated by the asset.
