Islamic Capital Market; (2) Sukuk

صكوك  (legal instrument or check) is a financial certificate in Islamic Finance which is commonly referred to as the Islamic equivalent of conventional bonds. Sukuk is the certificates representing proportional and undivided ownership right in tangible assets, a pool of predominantly tangible assets, or a business venture. These assets must be in a specific project or in investment activities that comply with shariah rules and principles.

Since interest-based bonds are not allowable in Islamic Finance, Sukuk securities are designed conforming to the Islamic law and investment principles, which disallows the interest.  Sukuk is the Islamic substitute for securities or bonds in the conventional system.
Principles of sukuk.

1. Transactions are permitted in ethical goods and services only.

2. Earning returns from intrest based transactions is prohibited.

3.  Investment in contracts with  Excessive uncertainty is also prohibited.

4. investment in Gambling and chance-based games is also prohibited.

5. Forward foreign exchange transactions are also prohibited.

The difference between Sukuk and Conversational bonds:

1. Ownership: while Sukuk indicate partial ownership of an asset, thdBonds indicate a debt obligation.
2. Compliance: while The assets that back sukuk is compliant with Shariah, the Bonds follows laws of country.
3. Pricing: while The face value of a sukuk is priced according to the value of the assets backing them, Bond pricing is based on credit rating, it means, the issuer's credit worthiness.
4. Rewards and risks: While Sukuk can increase in value when the assets increase in value, the Returns from bonds correspond to fixed interest.
5) Sales: while  the sale  ofa sukuk is selling ownership in the assets backing them,The sale of bonds is the sale of debt.

6) Principal: while Sukuk investors share the risk of the underlying asset by sharing profit and loss, the Bond investors are guaranteed the return of their initial investment/principal.

Products under Sukuk:

 a. Ijarah Sukuk funds: The Ijara Sukuk fund is used to purchase the assets for the purpose of leasing. Rentals received from the user are distributed among subscribers of the fund.

b. Commodity Sukuk funds: The Commodity Sukuk fund is used to buy different commodities for the purpose of resale. The profits generated by the sales are distributed among the subscribers.

c. Murabahah Sukuk funds:  Murabahah Sukuk funds is used to buy the commodities which are sold on a cost-plus basis. The profits generated by the sales are distributed among the subscribers.

d. Mixed funds: the subscription amounts of which are employed in different types of investment methods such as Mudaraba Sukuk, Musharaka Sukuk, Salam Sukuk, Istisna Sukuk and Hybrid Sukuk (Mudaraba + Ijara ..etc)

Application of Sukuk

1. Project-specific. 2.  Asset-specific, 3. Balance sheet specific.

1. Project-specific Sukuk

Under this category, money is raised through Sukuk for a specific project.

Case : Qatar Global Sukuk issued by the Government of Qatar in 2003 to mobilize resources for the construction of Hamad Medical City (HMC) in Doha. In this case, a joint venture special purpose vehicle (SPV), the Qatar Global Sukuk QSC, was incorporated in Qatar with limited liability. This SPV acquired the ownership of land parcel, that was registered in the name of HMC. The land parcel was placed in trust and Ijara-based Trust Certificates (TCs) were issued worth US$700 million due by October 2010. The annual floating rate of return was agreed at LIBOR plus 0.45 percent.

2. Assets-specific Sukuk

Under this arrangement, the resources are mobilized by selling the beneficiary right of the assets to the investors.

Case: the Government of Malaysia raised US$ 600 million through Ijara Sukuk Trust Certificates (TCs) in 2002. Under this arrangement, the beneficiary right of the land parcels has been sold by the government of Malaysia to an SPV, which was then re-sold to investors for five years. The SPV kept the beneficiary rights of the properties in trust and issued floating rate Sukuk to investors.

3. Balance Sheet-specific Sukuk

An example of the balance sheet specific use of Sukuk funds is the Islamic Development Bank (IDB) Sukuk issued in August 2003.

Case: The IDB (Islamic Development Bank), Jeddah mobilized these funds to finance various projects of the member countries. The IDB made its debut resource mobilization from the international capital market by issuing US$ 400 million five-year Sukuk due for maturity in 2008.