What are sukuks and how do they work?
Plural for sakk, sukuks are Sharia-compliant alternatives to conventional bonds. It is in line with Islamic teachings and prohibits “riba”, or interest. This makes interestbearing bonds or loans unacceptable for borrowers as a means of raising funds or for investors as investment opportunities.
Instead of earning interest over the lifespan of the Islamic investment certificate, investors receive a part of the earnings or profit generated.
Who issues them and when was it introduced? After a slow start in the early 2000 when they were first introduced in Malaysia, sukuks are now part of the funding mix of major corporations, financial institutions governments and sovereign wealth funds. Major markets for the bond include Indonesia, Malaysia, Pakistan, GCC and the Middle East and North Africa. Some western countries including the United Kingdom also use sukuk as an established funding tool. Like international bonds, sukuks are listed on exchanges. Nasdaq Dubai is one of the major listing hubs where sukuks are traded.
How are they different from regular bonds? They are different in how they are structured. Money is usually the underlying asset in a conventional bond, which pays a coupon or interest periodically through its life cycle with the face value of the certificate paid back at the maturity of the bond to investors. However, sukuks are either assetbased or asset-backed by land, property, factories or physical quantities of valuable commodities, in a partnership between the borrower and the investor, who gets the share of earnings or profit from that asset. Also, conventional bonds can be used to fund any segment of an economy, but sukuk cannot be used for purposes deemed harmful to society under Sharia, such as gambling.
In case of default, lenders holding a regular bond can lodge a lawsuit against the borrower, but with a sukuk, the underlying asset in the deal is sold to recover the outstanding amount.
What are the current trends in sukuk market? After a strong year in 2017, the global sukuk market has slowed down significantly in the first half of 2018, down 15.3 per cent to $44.2 billion (Dh162bn) compared with total issuances of $52.2bn in the first half of 2017, as global liquidity tightened and the cost of borrowing rises as the US Federal Reserve hike interest rates.