The is for financial certificates, but in Islamic

The word sukuk comes from
Arabic word which is for financial certificates, but in Islamic finance
commonly refers as bonds and can also be referred as a value document with
components or sukuk is a valuable letter that is in following with Islamic
principles primarily forbids the remission of riba or all of the property
ownership in gaining profits and services in the proprietorship of properties. Initially
founded and accepted wholly in orders with the quickly growing total of Muslim
populations in the world, sukuk has seen significant progress over the past 10
years in the global market, with a sum of rulers appointing the market and a
total of prominent corporate issuances. Sukuk are monetary products whose
structures and terms act in accordance with sharia, by means of the aim of
making profits similar to those of conservative fixed-income mechanisms like


               Bonds make interest at unreasonably high rates are not allowed in Islam due to fixed income, the Sukuk structure is
designed to meet the investment principles and claims of Islamic law, which
forbid impose or paying at unreasonably high rates. Financial assets that meet
Islamic law can be categorized based on incompetence and trade-inability in the
second market.

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               Conservative members have estimated that the Ten Years
Strategies and Frameworks suggest that over $ 1.2 trillion of assets are being
managed in reference to the principles of Islamic investment.  Such principles will form part of the
Shari’ah, often understood as ‘Islamic Law’, but in fact it is broader than
this because it also contains the spiritual and moral duties and
responsibilities in Islam. In the Persian and Asian Gulf regions, Standard
& Poor’s estimates that 20 percent of banking customers will prefer
spontaneous Islamic financial products more than conventions with a similar
return risk profile.


Meanwhile the old-style Western
interest-paying bond arrangement is not acceptable, the issuer of a sukuk sells a financier group a certificate, and
formerly uses continues in obtaining an asset, of which the financier group has
part proprietorship. As such, Sukuk safeties stick to Islamic laws occasionally
stated to as Shari’ah principles, which forbid the payment of interest or

Generally speaking, obedience with sharia
means that any returns resulting from these funding measures necessity to be
attained from profitable trading and risk-taking only, all kinds of
conservative interest revenue is forbidden and the assets that are matter to
the funding procedure must be permitted (halal).

Basically, Sukuk implements act as a channel.
They tie their issuers, mainly monarchs and organisations in the Southeast Asia
and Middle East, with a wide-ranging group of financiers, several of whom are
looking for to expand their assets further than traditional asset classes. In
this method, funds elevated over Sukuk can be owed in an effective and obvious
approach to setup inventiveness and additional worthy developments in the 56
associate nations of IDB, also as groups in over 100 non-member countries.

Both domestic and foreign investors buy Sukuk
having various structures approved by Shari’ah boards of Islamic scholars.

Sukuk bonds are designed in a way where the
issuer of the Sukuk vends the monetary document to the investor, who in turn
might charge it back to the Sukuk issuer for an agreed payment. The issuer will
also vow to purchase back the Sukuk bond at the similar price at an upcoming
date. Due to a prohibition on debt trading under Shariah law, a Sukuk bond must
be related with the cash flow and return of the funding to the bought asset.

Back in the early days, the Islamic caliphates
have shown to use the word sakk, also known as sukuk based on the documentary
evidences. The word sakk is the singular word for sukuk and literally means
deed or instrument. Sukuk has been seen to be used since the Islamic period
which was around 7th century till 13th century.  It was seen to be used in the form of papers
to represent financial obligation based on trades along with other commercial
activities. In written documents, the Cairo genizah document has shown to have
bits of proof of the existence of sakk in the 12th century. The
money orders during these times was seen to be the same as the modern cheques
are nowadays as it states the sum to be paid, the order, the date, and the name
of the issuer.

Moving on to the middle ages, sakk plays the
role as a written vow. It is used as paying for goods that are delivered and
avoiding money from entering dangerous terrain. The sukuk would then spread
across the world. The Jewish merchants from the Muslim would use the concept of
sukuk to Europe. Sukuk then became as an inspiration for modern day in making
cheques especially with the word cheque being derived from the Arabic word,

Continuing with the development of sukuk in
the modern history, sukuk is used as an instrument for the Islamic capital
markets. In February 1988, one of the first definition of modern day was
stated. It was during the fourth session of the Council of Islamic Fiqh Academy
in Jeddah. The Resolution No.30 (5/4) stated more on this matter. Basically,
the resolution states about the investment certificates and muqarada sukuk
which is also known as mudaraba sukuk. The decisions made by the Fiqh Academy
influences most of the Shariah-compliant financial institutions along with
their Shariah committees. Besides that, the Accounting and Audit Organisation
for Islamic Financial Institutions, also known as AAOIFI, which was established
in 1991 concentrates on ensuring the balance of Shariah standards with anything
related to finance.

In 1990, not long after the description was
stated, one of first few sukuk was issued. It was issued by Shell MDS in
Malaysia. Shell MDS Sdn Bhd issued sukuk with the amount of RM125 million.

In 2001, began the first issue of
international sukuk, US Dollar. The issuer was Kumpulan Guthrie, a Malaysian
company that is involved in plantation business. They issued sukuk with the
amount of US$150 million. Besides that, the first GRE that issued sukuk was the
Bahrain Monetary Authority which is now known as the Central Bank of Bahrain.
Due to the influence of Malaysia, The State of Qatar, The Republic of Pakistan,
and The Emirate of Dubai, few sovereign sukuk followed them and leads to an
increase in the international market for sukuk. The improvement of the sukuk in
the international market causes the AAOIFI issued a shariah standard in order
to ensure certainty on shariah related matters and its standardisation. AAOIFI
issued the Shariah Standard No.17 on investment sukuk in May 2003 which later
became effective in January 2004. One of the examples of an increase in sukuk
would be the Gulf Cooperation Council countries(GCC) that has managed to issue
sukuk with the amount of US$25.5 billion in 2005 to US$48.2 billion in 2007.

However, between late year of 2007 and early
year of 2009, the sukuk market has shown to be decreasing. This is mainly
caused by two reasons which is the debate that occurred in late 2007 on sukuk
structure, and the global financial crisis that happened around the year of

The first cause would be the debate on Shariah
compliances to some of the sukuk structures. It started by the end of 2007
where the chairman of AAOIFI, Sheikh Muhammad Taqi Usmani, issued a statement
on whether the sukuk instruments were actually Shariah-compliant or not. This
causes the AAOIFI scholars to hold meetings on the statement in the early year
of 2008 to discuss on the uncertainty that happened in the market. The result
from the meeting was the AAOIFI issued an official statement, the AAOIFI
Statement, that helps to give few guidance on the sukuk structures to be more
Shariah-compliant. The role of the AAOIFI Statement was to ensure the future
sukuk would be more structured and closer to the guidelines and standards set
in the statement.

Unfortunately, with the release of the
statement from the AAOIFI during the global financial crisis the sukuk market
went through a downfall. Though it was not confirmed whether the issue of the
sukuk was the cause of the downfall or it was coincidentally because of the
release of the statement was set during the financial crisis itself. Although
the statement was not a binding itself, it still managed to restrain the
economy for quite a while.

The AAOIFI Statement has made experts to
review the sukuk structures again and harmonise both Shariah principles stated
in the statement and the characteristics of conventional bonds is the same with
sukuk. From the AAOIFI Statement, the sukuk market has become more standardised
especially with the three sukuk which were ijara, murabaha, and
mudaraba-wakala. Even though the statement has given guidelines, there were
still doubts and uncertainties when it comes to the Shariah-compliant

Nowadays, the sukuk market has expanded well
globally and has been increased. It is seen that the sukuk market tends to be
one of the sources for the capital in companies especially in Southeast Asia,
Middle East, and North Africa. The current countries that is shown to be in the
lead of sukuk would be Malaysia, Indonesia, and Saudi Arabia.

First of all, one must understand the
different types of Sukuk. Sukuk can be divided into four basic types, which are
sales-based, lease-based, partnership-based, and lastly agency-based. AAOIFI
has specified 14 categories of permissible sukuk and several techniques that dcan
be employed to structure a sukuk transaction. Sukuk can be of many types
depending upon the type of Islamic modes of financing and trades used in its
structuring. However, the most important and common among those are ijarah,
murabahah, and mudarabah.

general, there are three types of contract frequently used in Sukuk which are Murabahah,
Ijarah and Mudarabah. Murabahah contract is an agreement between a buyer and
seller for the delivery of an asset, and the price includes the cost of the
asset plus an agreed-upon profit margin for the seller. The buyer can pay the
price on the spot or establish deferred payment terms which is paying either in
instalments or in one future lump sum payment. It is a sales-based contract used for
the purchase of equipment, products and other goods.

example, a distributor might issue sukuk murabahah to purchase goods in bulk to
raise funds from investors who subscribe to it, and the investors/sukuk holders
becomes owner of the goods and they sell it to the distributor at cost price
plus profit margin since they are investors and do not intend to own the goods.
Another good example is asset-based sukuk murabahah issues by Sunway City, a
well-known property developer in Malaysia. In this deal, there was no special purpose
vehicle(SPV) used. Instead, Sunway itself was the issuer. Sunway obtained
approval from SC on 10 October 2007 to issue RM500 million sukuk murabahah
under a medium-term note (MTN) programme.

time Sunway wants to raise funds, it will sell an identified asset to HSBC, who
is a facility agent acting on behalf of the investors, on a spot basis. An
asset purchase agreement (APA) will be signed. It is called a purchase
agreement as it reflects the investors’ perspective. HSBC will pay the purchase
price to Sunway with the proceeds raised from the issuance of sukuk. Since now
investors own the asset, they will sell it back to Sunway (via HSBC) on a
deferred basis. The deferred selling price will be higher than the spot
purchase price. Finally, Sunway will issue the sukuk murabahah to evidence its
obligation to pay the deferred selling price. Once the sale has taken place,
investors do not own the underlying asset used to facilitate the transaction
anymore. What they own is the entitlements/rights to the sales price due from

the other hand, Ijarah is lease-based sukuk. It can be defined as the transfer
of the usufruct of an asset to another person in exchange for a rent claimed
from that person. Ijarah’s nature as a sale and leaseback agreement make it
suitable if the issuing company has unencumbered assets that are commercially leasable,
such as real estate, ships or aircraft. The rental payments can be either fixed
or calculated with reference to the market rate. Sukuk al-ijarah is the most
commonly used sukuk structure and is regarded by some commentators as the
classical sukuk structure from which all other sukuk structures developed.
Ijarah is popular because it is simple and widely accepted and understood by
both conventional and sukuk investors as well as by the international rating

lease in an ijarah must comply with the general Shari’ah requirements
applicable to leases which are the lessor must have ownership of the asset or
the usufruct right in that asset before entering into a lease contract and the
benefit from an ijarah must be lawful under Shari’ah. For example, leasing
property to a shopkeeper selling alcohol would be unlawful. Other than that, the
leased assets must continue to exist throughout the period of the lease and any
assets which are consumed during that period cease to be leasable. In addition,
the period of the lease and amount payable therefore must be specified in
advance and the lessee must use the leased asset only for the purpose specified
in the lease or in absent of specified purpose, in conformity with customary

One case of sukuk in Malaysia, the Federal
Land Commissioner (FLC) holds the title to the Malaysian government’s landed
properties. To enable the sukuk issuance, FLC sold the beneficial title of the
Prime Minister’s Department’s staff quarters in Jalan Dato’ Onn and two
hospitals in Klang to an SPV, Malaysia Global Sukuk. Sale of beneficial title
means that FLC still holds the title, but it was held for the benefit of the
investors. In other words, FLC was just a bare trustee of the assets. The SPV
funded the purchase by issuing a floating rate trust certificate (sukuk),
representing beneficial ownership of the asset. The SPV (acting on behalf of
the investors) then leased the asset to the Malaysian government.

Other than that, under equity-based
partnership sukuk, we have mudarabah contract, which is a contract made between
two parties to undertake a business venture. One party is called rab al-maal or
the capital provider who provides the other party, called the mudarib or entrepreneur
with capital and the mudarib uses its expertise and labour to invest the
capital in return for a pre-agreed share of the profit generated.

In the context of sukuk, an SPV is usually
established to issue the sukuk and contribute the proceeds raised from the
investors as mudarabah capital (and therefore the SPV issuer becomes the rab
al-maal). The originator of the sukuk contributes expertise, labour and
possibly cash, serves as mudarib and manages the capital. Any profits generated
by the mudarabah are divided between the rab al-maal and the mudarib in
accordance with agreed profit-sharing ratios set out in the mudarabah
agreement. The SPV uses the profits it receives from the mudarabah to make
payments of the periodic distribution amounts due under the sukuk.

However, to understand more better on the
mudarabah sukuk, I provide with an illustration on DP World sukuk mudarabah. DP
World is the holding company for ports-related commercial activities of Dubai
World (owned by the Government of Dubai). It was established in Dubai
International Financial Centre (DIFC) on 9 August 2006 pursuant to a
restructuring plan designed to separate the ports-related commercial and
regulatory activities of the Government of Dubai. Following the restructuring,
DP World, together with its operating subsidiaries, conducts all of the
ports-related commercial activities of Dubai World while Dubai Ports Authority
(DPA), an affiliate of DP World conducts all of the ports-related regulatory
activities of the Government of Dubai.

On 2nd of July 2007, DP World
tapped in the sukuk market to raise US$1.5 billion using a mudarabah structure.
DP World sukuk first issued the sukuk and forwarded this to DP World as mudarabah
capital (on behalf of the investors). DP World (as mudarib) invested the capital
in its business operation (the port related activities). Among others, the
investment plan includes developing Terminal 2, a second terminal adjacent to
the current Jebel Ali Terminal within the Jebel Ali Free Zone. DP World was
also entitled to commingle its own assets with the mudarabah assets. The profit
sharing ratio between the SPV and DP World was 99:1.

Now that we know the variety of sukuk, there
are many differences between Sukuk and Conventional Bonds. Generally, what is
sukuk and conventional bonds? According to AAOIFI sukuk is defined as,
“certificates of equal value representing undivided shares in the ownership of
tangible assets, usufructs and services or (in the ownership of) the assets of
particular projects or special investment activity”. Whereas bonds are
“long-term debt instruments issued by corporations and governments”. The
definitions of sukuk and conventional bonds are different. Both items have
differences in terms of their characteristics.

Beginning with the relationship between
the bondholders and bond issuers are different. In sukuk it is a buyer-seller
relationship between the holder and issuer. Where the sukuk holders acts as the
owner of the assets while the sukuk issuers acts as the seller of assets. In
conventional bonds, the relationship of the holder and issuer is more of a
lender-borrower. The bondholder acts as the lender and the bond issuer acts as
the borrower. Also between holder and issuer, in sukuk it is more of a business
risk-return relationship as compared to the payment of the face value and
periodic interest is guaranteed by the bond issuer in conventional bonds.

Next, the Asset Ownership. In Sukuk,
partial ownership of the asset is given towards the sukuk seller because the
representation of the certificate. Whereas in conventional bonds, the bond
issuer is not issued a portion of the asset ownership that he or she invested
in. Because bonds act as a debt obligation of the issuer to the holder. The
assets involved in sukuk must be shariah compliant in order to be valid. It is
assured the investor that the value of the asset corresponds with the value of
the certificate. While in conventional bonds, the assets are required to comply
with local legislation. This can cause weariness in the Islamic investors as
their bonds may include assets that are not shariah compliant.

Moving on, the Issued Price. In sukuk, the
price of it is based on the market value of the underlying asset of which the
certificate is backed. This acts as both a risk and advantage for using sukuk.
Because the certificate is based on the market value of the asset and partial
ownership, it rewards its investors with profits that the asset produces, and
they have to bear the losses the asset incurred. So, if the asset value
increases, the value of the ownership also increases. This is different for
conventional bonds. The face value of the bond is based on the credit rating
and worthiness of the issuer. Bonds are debt related, therefore the bond
holders are subjected to interests that are set in a fixed rate and given out
periodically during the length of the bond. It does not increase the debt price
or the productivity.

Negotiability is restricted in specific
types of sukuk whereas in conventional bonds, the financial paper is

The Effects of Costs follows next. The
effects of costs affect the sukuk holders because it is connected to the
underlying assets issued and partial ownership, the holder has to bear the cost
that comes with the assets. This causes a situation where the investors profits
are decreased due to the increased in cost of the asset, and the same thing can
happen vice versa. The conventional bond holder is not affected by the costs of
the asset that they supported. The performance of the underlying asset also
does not affect the investor rewards.

Other than that, the return that is given
back by the sukuk holders are expected from the underlying assets, thus it is
not guaranteed. Whereas the return for the conventional bond would be the
principal and the interests as it is an obligation for the issuer.

In other words, though there are many
differences between sukuk and conventional bonds, they do share some
similarities. Some are as follows, by selling the sukuk and conventional bonds
in a secondary market, it can be exchanged for money. Next, constant periodic
income is provided by both bonds. Lastly, the tangible or intangible asset,
with deferred delivery of description or existing assets, usufruct, or a
service asset is similar to conventional bonds.