View source for Sukuk

{{Short description|Financial instruments in Islamic law}}
{{Use dmy dates|date=September 2019}}
{{Fiqh|economic}}

'''Sukuk''' ({{langx|ar|صكوك|ṣukūk}}; plural{{efn|In common usage outside of Arabic-speaking countries, the word "sukuk" is often used both as singular as well as plural}} of {{langx|ar|صك|ṣakk|legal instrument, deed, cheque|links=no}}) is the Arabic name for [[Financial instrument|financial certificates]], also commonly referred to as "[[sharia]] compliant" [[Bond (finance)|bonds]].
Sukuk are defined by the AAOIFI ([[Accounting and Auditing Organization for Islamic Financial Institutions]]) as "[[securities]] of equal denomination representing individual ownership interests in a portfolio of eligible existing or future [[asset]]s."{{#tag:ref|AAOIFI Standard 17, quoted in<ref name=WIWWIE2013:251>[[#WIWWIE2013|Khan, ''What Is Wrong with Islamic Economics?'', 2013]]: p.251</ref>|group=Note}} The [[Fiqh]] academy of the [[OIC]] legitimized the use of sukuk in February 1988.<ref name=Visser_2009:63>Visser, Hans. 2009. ''Islamic finance: Principles and practice.'' Cheltenham, UK and Northampton MA, Edward Elgar. p.63</ref><ref name=WIWWIE2013:251>[[#WIWWIE2013|Khan, ''What Is Wrong with Islamic Economics?'', 2013]]: p.251</ref>

Sukuk were developed as an alternative to conventional bonds which are not considered permissible by many Muslims as they pay [[interest]] (prohibited or discouraged as [[Riba]], or [[usury]]), and also may finance businesses involved in activities not permitted under [[Sharia]] (gambling, alcohol, pork, etc.).  Sukuk securities are structured to comply with Sharia by paying profit, not interest—generally by involving a [[Asset#Tangible assets|tangible asset]] in the investment. For example, Sukuk securities may have partial ownership of a property built by the investment company (and held in a [[Special-purpose entity|Special Purpose Vehicle]]), so that sukuk holders can collect the property's profit as [[Renting|rent]], (which is allowed under Islamic law). Because they represent ownership of [[real asset]]s and (at least in theory) do not guarantee repayment of initial investment, sukuk resemble [[Equity (finance)|equity]] instruments,<ref name=":3">{{Cite web|url=https://www.ft.com/content/cec38bf2-440b-11df-9235-00144feab49a|title=Islamic finance's sukuk explained|last=Hayat|first=Usman|date=11 April 2010|website=www.ft.com|language=en-GB|access-date=29 March 2017}}</ref> but like a bond (and unlike equity) regular payments cease upon their expiration. However, most sukuk are "asset-based" rather than "asset-backed"—their assets are not truly owned by their [[Special-purpose entity|Special Purpose Vehicle]], and their holders have recourse to the originator if there is a shortfall in payments.<ref name=FJIFD2012:210/>

Different types of sukuk are based on different structures of Islamic contracts (Murabaha, Ijara, Istisna, Musharaka, Istithmar, etc.) depending on the project the sukuk is financing.<ref name="FJIFD2012:214">[[#FJIFD2012|Jamaldeen, ''Islamic Finance For Dummies'', 2012]]:214</ref>

According to the State of the Global Islamic Economy Report 2016/17, of the $2.004 trillion of assets being managed in a sharia compliant manner in 2014, $342 billion were sukuk, being made up of 2,354 sukuk issues.<ref name=reutersSGIER2015-16>{{cite book |publisher=Thomson Reuters & Dinar Standard |title=State of the Global Islamic Economy Report 2015/16 |pages=54–55 |url=http://www.startupbusiness.it/wp-content/uploads/2016/10/SALAAM03102016111130.pdf |access-date=19 March 2017}}</ref>

== Etymology ==
The [[Arabic]] term ''ṣakk'' was borrowed from [[Persian language|Classical Persian]] [[wiktionary:چک#Persian|چک]] (''čak'', “legal document, document, contract, deed of sale, bill”).<ref>{{Cite web |title=Definition of چک |url=https://dehkhoda.ut.ac.ir/en/dictionary/%DA%86%DA%A9 |access-date=2024-03-28 |website=Dehkhoda Lexicon Institute and International Center for Persian Studies |language=en}}</ref><ref>{{Cite web |last=Foundation |first=Encyclopaedia Iranica |date=December 15, 1990 |title=ČAK |url=https://www.iranicaonline.org/articles/cak-middle-pers#:~:text=%C4%8CAK%2C%20(%3C%20Middle%20Pers.,a%20loanword%20from%20Semitic%2C%20cf. |access-date=2024-03-28 |website=iranicaonline.org |language=en-US}}</ref>

==History==
In the classical period of [[Islam]], Sakk (sukuk) meant any document representing a [[contract]] or [[Conveyancing|conveyance]] of rights, obligations or monies done in conformity with the [[Shariah]].{{Citation needed|date=March 2017}}  The term was used to refer to forms of papers representing financial obligations originating from trade and other commercial activities in the Islamic pre-modern period.<ref>N. J. Adam and A. Thomas, "Islamic fixed-income securities: sukuk" in S. Jaffar (ed), Islamic Asset Management: Forming the Future for Shari’a-Compliant Investment
Strategies (London: Euromoney Books, 2004), p.73, cited in {{Cite journal|last1=Saeed|first1=A.|last2=Salah|first2=O. |year=2014|orig-year=2013|title=Development of Sukuk: Pragmatic and Idealist Approaches to Sukuk Structures |url=http://www.debrauw.com/wp-content/uploads/NEWS%20-%20PUBLICATIONS/Development-Sukuk-Pragmatic-and-Idealist-Approaches-to-20-Sukuk-20Structures.pdf |journal=Journal of International Banking Law and Regulation|pages=45–6}}</ref><ref>A. Thomas, "What are Sukuk?" [2003] AJIF.org LLC, cited in {{Cite journal|last1=Saeed|first1=A.|last2=Salah|first2=O. |year=2014|orig-year=2013|title=Development of Sukuk: Pragmatic and Idealist Approaches to Sukuk Structures |url=http://www.debrauw.com/wp-content/uploads/NEWS%20-%20PUBLICATIONS/Development-Sukuk-Pragmatic-and-Idealist-Approaches-to-20-Sukuk-20Structures.pdf |journal=Journal of International Banking Law and Regulation|pages=45–6}}</ref><ref>M. A. Khan, Islamic Economics and Finance: A Glossary (Routledge: London, 2003), p.163, cited in {{Cite journal|last1=Saeed|first1=A.|last2=Salah|first2=O. |year=2014|orig-year=2013|title=Development of Sukuk: Pragmatic and Idealist Approaches to Sukuk Structures |url=http://www.debrauw.com/wp-content/uploads/NEWS%20-%20PUBLICATIONS/Development-Sukuk-Pragmatic-and-Idealist-Approaches-to-20-Sukuk-20Structures.pdf |journal=Journal of International Banking Law and Regulation|pages=45–6}}</ref>

According to Camille Paldi, the first sukuk transaction took place in [[Damascus]] in its [[Umayyad Mosque|Great Mosque]] in the 7th century AD.<ref name="Paldi-2">{{Cite web|url=https://www.slideshare.net/CamillePaldi/the-history-of-sukuk|title=History of Sukuk|last=Paldi|first=Camille|date=19 October 2014|publisher=FAAIF|page=2}}</ref> Muslim traders are known to have used the cheque or ''ṣakk'' system since the time of [[Harun al-Rashid]] (9th century) of the [[Abbasid Caliphate]].<ref name="glubb">{{citation|last=Glubb|first=John Bagot|title=A Short History of the Arab Peoples|year=1988|page=105|publisher=Dorset Press|isbn=978-0-88029-226-9|oclc=603697876}}</ref><ref name="Labib-69-92">Subhi Y. Labib (1969), "Capitalism in Medieval Islam", ''The Journal of Economic History'' '''29''' (1), pp. 79–96 [92–3].</ref>

The modern Western word "cheque" appears to have been derived from "''sakk''" (singular of ''sukuk''),<ref>G. W. Heck, Charlemagne, Muhammad, and the Arab roots of capitalism (Berlin: Walter de Gruyter, 2006), p.217–218</ref><ref>A. L. Udovitch, "Bankers without Banks: Commerce, Banking, and Society in the Islamic World of the Middle Ages" in Centre for Medieval and Renaissance Studies, UCLA (ed), The Dawn of Modern Banking (New Haven & London: Yale University Press, 1979), p.268–274</ref><ref>A. L. Udovitch, "Trade" in J. R. Strayer (ed), The Dictionary of the Middle Ages, Volume 12 (New York: Charles Scribner's Sons, 1989), p.105–108.</ref> {{#tag:ref|The UK based educational project and exhibition exploring the Muslim contributions to building the foundations of Modern Civilisation, called "1001 Inventions: Discover the Muslim Heritage in Our World", also confirmed that the word "cheque" comes from "sakk".<ref>See 1001 Inventions at http://www.1001inventions.com [Accessed 27 October 2013]; P. Vallely, "How Islamic inventors changed the world" The Independent, 11 March 2006.cited in {{Cite journal|last1=Saeed|first1=A.|last2=Salah|first2=O. |year=2014|orig-year=2013|title=Development of Sukuk: Pragmatic and Idealist Approaches to Sukuk Structures |url=http://www.debrauw.com/wp-content/uploads/NEWS%20-%20PUBLICATIONS/Development-Sukuk-Pragmatic-and-Idealist-Approaches-to-20-Sukuk-20Structures.pdf |journal=Journal of International Banking Law and Regulation|pages=45–6}}</ref>|group=Note}} which during the Middle Ages referred to a written agreement "to pay for goods when they were delivered" and was used to "avoid money having to be transported across dangerous terrain".<ref>P. Vallely, "How Islamic inventors changed the world" The Independent, 11 March 2006 at https://www.independent.co.uk/news/science/how-islamic-inventors-changed-the-world-469452.html [Accessed 27 October 2013], cited in {{Cite journal|last1=Saeed|first1=A.|last2=Salah|first2=O. |year=2014|orig-year=2013|title=Development of Sukuk: Pragmatic and Idealist Approaches to Sukuk Structures |url=http://www.debrauw.com/wp-content/uploads/NEWS%20-%20PUBLICATIONS/Development-Sukuk-Pragmatic-and-Idealist-Approaches-to-20-Sukuk-20Structures.pdf |journal=Journal of International Banking Law and Regulation|pages=45–6}}</ref>

;Modern
Answering a need to provide short and medium term instruments so that balance sheets of Islamic financial institutions could be more liquid, the Fiqh academy of the [[OIC]] (Organization of Islamic Countries) legitimized the use of sukuk in February 1988.<ref name="Visser_2009:63" /><ref name="WIWWIE2013:251" />

In 1990 one of the first contemporary sukuk—worth RM125 million—were issued by Malaysia Shell MDS Sdn Bhd, on the basis of ''bai' bithaman ajil''.<ref name="IIFM_Report_2012:3">International Islamic Financial Market, 2012. ''Sukuk report: A comprehensive study of the global sukuk market'', http://iifm.net/media/pdf/iifm_suku_report_2.pdf</ref><ref name="Paldi-17">{{Cite web|url=https://www.slideshare.net/CamillePaldi/the-history-of-sukuk|title=History of Sukuk|last=Paldi|first=Camille|date=19 October 2014|publisher=FAAIF|page=17}}</ref> The next major Sukuk Issuances was by Kuala Lumpur International Airport RM2.2 billion each in 1996 and 1997.<ref name="SSDoS2014:">Securities Commission of Malaysia</ref> In 2000, the government of Sudan issued domestic sovereign short-term sukuk worth 77 million Sudanese pounds on the basis of ''musharaka''. In 2001, the sukuk market went international with the issuance of the first US-dollar-denominated ''ijara sukuk'', worth $100 million by the Central Bank of Bahrain. Since then many sovereign and corporate sukuk issues have been offered in various jurisdictions.<ref name="WIWWIE2013:306-7">[[#WIWWIE2013|Khan, ''What Is Wrong with Islamic Economics?'', 2013]]: p.306-7</ref>

To standardize the growing market, the [[Accounting and Auditing Organization for Islamic Financial Institutions|AAOIF]]<ref name="Paldi-6">{{Cite web|url=https://www.slideshare.net/CamillePaldi/the-history-of-sukuk|title=History of Sukuk|last=Paldi|first=Camille|date=19 October 2014|publisher=FAAIF|page=6}}</ref> issued "Shari’ah Standard No.17" on 'Investment Sukuk' in May 2003. It became effective starting 1 January 2004.<ref name=SSDoS2014:/>

==Industry==
{| class="wikitable"  style="float: right;"
!colspan=2|International Sukuk Issuance
|-
|2007||$13.8 billion<ref name=WIWWIE2013:307/>
|-
|2008 ||$2.14 billion<ref name=WIWWIE2013:307/>
|-
|2009||$7.47 billion<ref name=WIWWIE2013:307/>
|-
|2010 ||$5.35 billion<ref name=WIWWIE2013:307/>
|-
|2011 ||~$80 billion<ref name=imf-2015-14/>
|-
|2012 || <$150 billion<ref name=forbes-2016/>
|-
|2013 || >$120 billion<ref name=forbes-2016/><ref name=imf-2015-14/>
|-
|2014 ||~$130 billion<ref name=imf-2015-14>"[https://www.imf.org/external/pubs/ft/sdn/2015/sdn1505.pdf Islamic Finance: Opportunities, Challenges, and Policy Options]", IMF, April 2015, p.14</ref>
|-
|2015 || >$100 billion
|-
|2016 || $72.9 billion<ref>Global sukuk issuance expected to be lower this year, Ganeshwaran Kana ''Jakarta Post'', 7 March 2017</ref>
|-
!colspan=2|<small>SOURCES: 2012 International Islamic <br>Financial Market report p.&nbsp;12,<ref name=WIWWIE2013:307>[[#WIWWIE2013|Khan, ''What Is Wrong with Islamic Economics?'', 2013]]: p.307</ref> <br>Forbes,<ref name=forbes-2016>[https://www.forbes.com/sites/dominicdudley/2016/09/21/sukuk-struggles-to-grow/#1aeb28165e2b Sukuk Market Struggles To Find Sources Of Growth]| ''Forbes''| 21 September 2016</ref></small>
|}
As of early 2017, there were US$328 billion worth of sukuk outstanding worldwide.<ref>{{Cite web|url=http://www.thestar.com.my/business/business-news/2017/01/06/fed-clouds-2017-global-sukuk-sales-outlook-for-top-arranger/|title=Fed clouds 2017 global sukuk sales outlook for top arranger|date=6 January 2017|website=www.thestar.com.my|agency=The Star Online|access-date=13 March 2017}}</ref> As of the end of 2016, there were about 146 US Dollar-denominated, Islamic fixed income securities issued in the global markets, that were [[Investment grade|investment-grade]], and had a duration of at least one year. These securities—which make up the [[Citigroup|Citi]] Sukuk Index—had an average maturity of 4.54 years, and most were issued by governments.<ref name=":2">{{Cite web|url=https://www.yieldbook.com/x/ixFactSheet/factsheet_quarterly_sukuk.pdf|title=Sukuk Index|date=31 December 2016|website=yieldbook.com|access-date=16 March 2017}}</ref> The top four issuers by market weight—making up over 40% of the market—were: [[Islamic Development Bank|ISLAMIC DEVELOPMENT BANK]], PERUSAHAAN PENERBIT SBSN INDOIII, [[Saudi Electricity Company|SAUDI ELECTRICITY CO]], SOQ SUKUK A QSC.<ref name=":2" /> About 3/4 of the sukuk market is domestic, not international.<ref name="imf-2015-14" /> Most sukuk are not investment grade however,<ref name=FKIBP2015:108>[[#FKIBP2015|Khan, ''Islamic Banking in Pakistan'', 2015]]: p.108</ref> and as of 2015, there were 2,354 sukuk issues in total, including local currency denominated, non-global market sukuk, according to Thomson Reuters & Dinar Standard.<ref name=reutersSGIER2015-16/> According to the Malaysian International Islamic Financial Centre, as of 2013 the biggest issuers of sukuk were governments (65.6%), and the second largest were power and utility companies (13.6%).<ref name=FKIBP2015:108/>

===Secondary market===
Sukuk securities tend to be bought and held. As a result, few securities enter the secondary market to be traded. Furthermore, only public Sukuk are able to enter this market, as they are listed on stock exchanges.

The secondary market—whilst developing—remains a niche segment with virtually all of the trading done at the institution level. The size of the secondary market remains unknown, though LMC Bahrain states they traded $55.5 million of Sukuk in 2007.<ref name="lcb">[http://lmcbahrain.com/trade.asp Trades executed in the secondary market], Liquidity Management Centre</ref> As of July 2014 sukuk.com listed fifteen sukuk on the secondary market for Gulf Sukuk.<ref>{{Cite news|url=https://www.sukuk.com/article/sukuk-market-summary-secondary-market-prices-2160/|title=Sukuk Market Summary and Secondary Market Prices – Sukuk.com is the Home of the Sukuk Industry|work=Sukuk.com is the Home of the Sukuk Industry|language=en-US|access-date=15 March 2017}}</ref>

==Principles==
Ali Arsalan Tariq states that Islamic finance—including sukuk—is based on a set of several prohibitions:<ref name=":0">{{Cite book|url=http://www.sbp.org.pk/departments/ibd/sukuk-risks.pdf|title=MANAGING FINANCIAL RISKS OF SUKUK STRUCTURES|last=Tariq|first=Ali Arsalan|date=September 2004|location=Loughborough University, UK|pages=9}}</ref>
# Transactions in unethical goods and services;<ref name=":0" />
# Earning returns from a loan contract (Riba/Interest);<ref name=":0" />
# Compensation-based restructuring of debts;<ref name=":0" />
# Excessive uncertainty in contracts (''[[Gharar]]'');<ref name=":0" />
# Gambling and chance-based games (''Qimar'');<ref name=":0" />
# Trading in debt contracts at discount, and;<ref name=":0" />
# Forward foreign exchange transactions.<ref name=":0" />
As Shari’ah considers money to be a measuring tool for value and not an [[asset]] in itself, it requires that one should not receive [[income]] from money (or anything that has the [[genus]] of money) alone, as this (simplistically, [[interest]]) is "''[[riba]]''", and forbidden.  From a Sharia perspective, certificates of debt are not tradable except at their par value (although a different view is held by many in Malaysia).{{citation needed|date=March 2017}}

While a bond is a contractual debt obligation of the issuer to pay to bondholders, on
certain specified dates, interest and principal; a Sukuk is a certificate giving Sukuk holders an undivided beneficial ownership in the underlying assets. Consequently, Sukuk holders are entitled to share in the revenues generated by the Sukuk assets as well as being entitled to share in the proceeds of the realization of the Sukuk assets.<ref name=sukuk.com-7>{{Cite web|url=http://www.sukuk.com/wp-content/uploads/2014/03/Sukuk-Structures.pdf|title=Sukuk. An Introduction to the Underlying Principles and Structure|date=June 2006|page=7}}</ref>

===Similarities with bonds===
* Sukuk and bonds are sold to investors who receive a stream of payments{{#tag:ref|an exception is the "zero coupon" bond or sukuk where there is no payout or coupon but the value of the bond/sukuk increases until maturity.<ref>{{cite web |url=http://www.investment-and-finance.net/islamic-finance/z/zero-coupon-nontradable-sukuk.html |title=Zero-Coupon Nontradable Sukuk |access-date=14 March 2017}}</ref>|group=Note}} until the date of the maturity of the sukuk or bond, at which time they get their original investment (in the case of sukuk a full payment is not guaranteed) back.<ref name="FJIFD2012:207-13">[[#FJIFD2012|Jamaldeen, ''Islamic Finance For Dummies'', 2012]]:207-13</ref>
* Sukuk and bonds are intended to provide investment with less risk than [[Equity (finance)|equities]] (such as shares of stock) and so are often used to "balance a [[Portfolio investment|portfolio]]" of investment instruments.<ref name="FJIFD2012:208">[[#FJIFD2012|Jamaldeen, ''Islamic Finance For Dummies'', 2012]]:208</ref>
* Both Sukuk and bonds must issue a disclosure document known as a [[Prospectus (finance)|prospectus]] to describe the security they are selling.
* To give investors an idea of how much risk is involved in particular sukuk/bonds, rating agencies rate the [[Credit risk|credit worthiness]] of the issuers of the sukuk/bond.<ref name="FJIFD2012:212-3">[[#FJIFD2012|Jamaldeen, ''Islamic Finance For Dummies'', 2012]]:212-3</ref>
* Both sukuk and bonds are initially sold by their issuers. After that they (or some sukuk and bonds) may be bought and sold by brokers and agents, mostly on the [[Over-the-counter (finance)|over-the-counter]] (OTC) market, but are also available on some stock exchanges around the world.<ref name="FJIFD2012:211-2">[[#FJIFD2012|Jamaldeen, ''Islamic Finance For Dummies'', 2012]]:211-2</ref>

===Differences from bonds===
* Ownership: Sukuk should indicate partial ownership of an asset. Bonds indicate a debt obligation.<ref name=sukuk.com/><ref name=FJIFD2012:211>[[#FJIFD2012|Jamaldeen, ''Islamic Finance For Dummies'', 2012]]:211</ref>
* Compliance: The assets that back sukuk should be compliant with Shariah. Bonds need only comply with laws of country/locality they are issued in.<ref name=sukuk.com/><ref name=FJIFD2012:211/>
* Pricing: The face value of a sukuk is priced according to the value of the assets backing them. Bond pricing is based on credit rating, i.e. the issuer's credit worthiness.<ref name=sukuk.com/><ref name=FJIFD2012:211/>
* Rewards and risks: Sukuk can increase in value when the assets increase in value. Returns from bonds correspond to fixed interest.<ref name=sukuk.com/><ref name=FJIFD2012:211/> (Because most bonds' interest rates are fixed, most increase in value when the ''market'' interest rates fall.)
* Sales: When you sell sukuk, you are selling ownership in the assets backing them. (In instances where the certificate represents a debt to the holder, the certificate will not be tradable on the secondary market and instead should be held until maturity.)<ref name="Paldi-4">{{Cite web|url=https://www.slideshare.net/CamillePaldi/the-history-of-sukuk|title=History of Sukuk|last=Paldi|first=Camille|date=19 October 2014|publisher=FAAIF|page=4}}</ref> The sale of bonds is the sale of debt.<ref name=sukuk.com>{{cite web| url=https://www.sukuk.com/education/important-differences-sukuk-traditional-bonds-2207/#sthash.Z2xL87B0.dpuf |title=Five Important Differences Between Sukuk and Traditional Bonds |last1=Mohammed |first1=Naveed |date=26 July 2014 |access-date=14 March 2017 }}</ref><ref name=FJIFD2012:211/>
* Principal: Sukuk investors (in theory) share the risk of the underlying asset and may not get all their initial investment (the face value of the sukuk) back. (The value payable to the Sukuk-holder on maturity should be the current market value of the assets or enterprise and not the principal originally invested, according to Taqi Usamani.)<ref name="MTUS2007:3-4">[[#MTUS2007|Usmani, ''Sukuk and their Contemporary Applications'', 2007]]:3–4</ref> Bond investors are guaranteed the return of their initial investment/principal.<ref name=FJIFD2012:210>[[#FJIFD2012|Jamaldeen, ''Islamic Finance For Dummies'', 2012]]:210</ref> In practice some sukuk are issued with repurchase guarantees.<ref name=FJIFD2012:210/>
* Conventional bonds are issued with underwriters. Sukuk underwriters do not usually conduct the issuance and may not be required. Sukuk use Special Purpose Vehicles to be the trustee/issuer of the sukuk.<ref name=FJIFD2012:214-5>[[#FJIFD2012|Jamaldeen, ''Islamic Finance For Dummies'', 2012]]:214-5</ref>

==Definitions, structure and characteristics==
;Definitions
The AAOIFI ([[Accounting and Auditing Organization for Islamic Financial Institutions]], the body which issues standards on accounting, auditing, governance, ethical, and Shari'a standards) defines Sukuk as "securities of equal denomination representing individual ownership interests in a portfolio of eligible existing or future assets,"{{#tag:ref|AAOIFI Standard 17, quoted in<ref name=WIWWIE2013:251>[[#WIWWIE2013|Khan, ''What Is Wrong with Islamic Economics?'', 2013]]: p.251</ref>|group=Note}} or "'certificates of equal value representing undivided shares in the ownership of tangible assets, [[usufruct]]s and services or (in the ownership of) the assets of particular projects or special investment activity'."<ref>Definition in paragraph 2 of page 307 of Shariah Standards for Financial Institutions 2008, published by Accounting and Auditing Organisation for Islamic Financial Institutions, cited in {{cite web |url=http://www.nortonrosefulbright.com/knowledge/publications/16852/aaoifi-statement-on-sukuk-and-its-implications |title=AAOIFI Statement on Sukuk and its implications |website=Norton Rose Fulbright &#124; Global law firm |date=September 2008 |access-date=13 March 2017}}</ref>

The Islamic Financial Services Board defines sukuk as: <blockquote>certificates with each sakk representing a proportional undivided ownership right in tangible assets, or a pool of predominantly tangible assets, or a business venture. These assets may be in a specific project or investment activity in accordance with Sharia rules and principles.<ref name=":1">{{Cite book|url=https://books.google.com/books?id=zUozAQAAQBAJ&pg=PA57|title=Global Sukūk and Islamic Securitization Market: Financial Engineering and Product Innovation|last=al-Amine|first=Muhammad al-Bashir Muhammad|publisher=BRILL|year=2009|isbn=9789004207448|pages=57–8|language=en}}</ref></blockquote>

The Securities Commission of Malaysia defined sukuk as a document or certificate, which represents the value of an asset.<ref name="Paldi-4"/>

;Need
Sharia forbids both the trading of short-term debt instruments except at face value, and the drawing upon the established interbank money markets (both being seen as transactions involve interest and excessive uncertainty (''[[Gharar]]'')). As a consequence, prior to the development of the sukuk market, the balance sheets of Islamic financial institutions tended to be highly illiquid and lacking in short and medium term investment opportunities for their current assets.<ref name="Paldi-6"/>

;Structure and characteristics
Sukuk are structured in several different ways. (The [[Accounting and Auditing Organization for Islamic Financial Institutions|AAOIFI]] has laid down 14 different types of sukuk.)<ref name=sukuk.com-5>{{Cite web|url=http://www.sukuk.com/wp-content/uploads/2014/03/Sukuk-Structures.pdf|title=Sukuk. An Introduction to the Underlying Principles and Structure|date=June 2006|page=5|access-date=16 March 2017}}</ref> While a conventional bond is a promise to repay a loan, sukuk constitute partial ownership in a debt, asset, project, business or investment.
* debt (''[[Sukuk Murabaha]]''). These sukuk are not common because their payments to investors represent debt and are therefore not tradable or negotiable according to sharia. (If diluted with other non-murahaha sukuk in a mixed portfolio they may be traded).<ref name=FJIFD2012:220>[[#FJIFD2012|Jamaldeen, ''Islamic Finance For Dummies'', 2012]]:220</ref>
* asset (''[[Sukuk Al Ijara]]''). These are "essentially" rental or lease contracts, or conventional lease-revenue bonds. With these sukuk, the borrower's tangible asset is 'sold' to the financier and then 'leased' back to the borrowers. The borrowers then make regular payments back to the financiers from the income stream generated by the asset.<ref name=FKIBP2015:106/> They are the most common type of sukuk (as of 2015),<ref name=FKIBP2015:106>[[#FKIBP2015|Khan, ''Islamic Banking in Pakistan'', 2015]]: p.106</ref> and have been described (by Faleel Jamaldeen) as well known because of there simplicity, tradability and ability to provide a fixed flow of income.<ref name=FJIFD2012:220/>
* asset at a future date. (''[[Sukuk al-Salam]]''). In this sukuk the SPV does not buy an asset but agrees to buy one at a future date in exchange for advance payments. The asset is then sold in the future for its cost plus a profit by an agent. On (or before) the date agreed to in the contract, the seller delivers the asset to the agent who sells the asset who passes the proceeds (minus expenses/fees) on to the SPV, which distributes the proceeds to the sukuk holders.<ref name=FJIFD2012:221-2>[[#FJIFD2012|Jamaldeen, ''Islamic Finance For Dummies'', 2012]]:221-2</ref> ''Sukuk al-Salam'' are (at least usually) used to support a company's short term liquidity requirements.<ref name=FJIFD2012:220/> Holders receive payment not with a regular flow of income, but at maturity—similar to a [[zero-coupon bond]].<ref name=FJIFD2012:221-2/> An example of this kind of sukuk are 91-day CBB Sukuk Al-Salam issued by Central Bank of Bahrain.<ref>{{Cite web|url=http://www.cbb.gov.bh/page-p-_cbb_sukuk_al-salam_securities_subscribed.htm|title=Central Bank of Bahrain – CBB Sukuk Al-Salam Securities Subscribed|date=20 June 2016|website=www.cbb.gov.bh|access-date=16 March 2017}}</ref>
* project (''[[Sukuk Al Istisna]]''). These sukuk are complex and cannot be traded in the secondary market or sold to a third party for less than its face value.<ref name="FJIFD2012:225">[[#FJIFD2012|Jamaldeen, ''Islamic Finance For Dummies'', 2012]]:225</ref>
* business (''[[Sukuk Al Musharaka]]''). These sukuk holders are also the owners of the originator issuing the sukuk and participate in the decision-making. These sukuk can be traded in the secondary market.<ref name="FJIFD2012:224">[[#FJIFD2012|Jamaldeen, ''Islamic Finance For Dummies'', 2012]]:224</ref>
* or investment (''[[Sukuk Al Istithmar]]'').<ref>{{cite news |url=http://print.thefinancialexpress-bd.com/2015/04/02/87169 |title=Sukuk in the South Asian stock market |date=2 April 2015 |access-date=16 March 2017 |last1=Abdul Mazid |first1=Muhammad  }}</ref><ref>{{cite web|title=Definition of sukuk (Islamic bonds)|url=http://lexicon.ft.com/Term?term=sukuk-(Islamic-bonds)|website=ft.com/lexicon|access-date=11 March 2017}}</ref>

The most commonly used sukuk structures replicate the cash flows of conventional bonds. Such structures are listed on exchanges, commonly the [[Luxembourg Stock Exchange]] and [[London Stock Exchange]] in Europe, and made tradable through conventional organisations like [[Euroclear Bank]] or [[Clearstream Banking SA]]. A key technique to achieve capital protection without amounting to a loan is a binding promise to repurchase certain assets; e.g. in the case of ''Sukuk Al Ijara'', by the issuer. In the meantime a rent is being paid, which is often benchmarked to an interest rate ([[LIBOR]] is the most common though its use is criticized by some Sharia Scholars).<ref>{{Cite book|url=https://books.google.com/books?id=BANEBgAAQBAJ&pg=PA138|title=The Transformation of Islamic Law in Global Financial Markets|last=Ercanbrack|first=Jonathan|date=2015|publisher=Cambridge University Press|isbn=9781107061507|location=Cambridge|pages=138|language=en}}</ref>

The most accepted structure, which is tradable, is thereafter the ''Sukuk Al Ijara''. Debt certificates can only be bought before the finance occurs and then held to maturity, from an Islamic perspective. This is critical for debt trading at market value without incurring the prohibited ''[[riba]]'' (interest on [[money]]).{{Citation needed|date=August 2015}}

===Issuing and payment process===
Step-by-step process of issuing a sukuk based on an asset:

# The originator—a business firm requiring capital—creates a [[special purpose vehicle]] (SPV), an independent entity and structures. The SPV protects the sukuk assets from creditors if the originator has financial troubles.<ref>{{citation|title=SUKUK, SPV AND BORROWING WITH COLLATERAL??|date=12 January 2011|website=ISLAMIC LAW OF FINANCE|quote=url link does not work, blacklisted by wikipedia|last1=Abdul RAHMAN|first1=Z.A.<!--|access-date=9 March 2017-->}}</ref> It specifies what asset or activity the sukuk will support, how large the issuance of sukuk will be, their face amounts, interest rates, maturity date. SPV are often located in "tax-efficient jurisdictions" such as Bahrain, Luxembourg or the Cayman Islands.<ref name="FJIFD2012:217">[[#FJIFD2012|Jamaldeen, ''Islamic Finance For Dummies'', 2012]]:217</ref>
# The SPV issues the sukuk offering it for sale to investors with an agreement spelling out the relationship between obligator and sukuk holders (depending on the type of sukuk this can be lessor and lessee, partner, etc.).
# With the money from the sale of sukuk certificates, the SPV passes offering to the originator who makes the sharia compliant asset purchase, lease, joint venture, etc. (again depending on the type of sukuk).
# The SPV purchases assets (such as land, building, machinery) from the originator.
# The sale proceeds are paid to the originator/debtor as the price of the assets.
# The SPV, acting as a trustee on behalf of the sukuk-holders, arranges to lease the assets back to the originator who pays the sukuk-holders the lease income.
# The originator buys back the asset from the SPV at a nominal price on termination of the lease.<ref name=Balala_2011:145>Balala, Mahah-Hanaan. 2011. ''Islamic finance and law''. London and New York: I.B. Tauris. p.145</ref>
In this type of sukuk, fixed interest of a conventional bond is replaced by fixed lease income. Islamic economist Muhammad Akram Khan complains that sukuk are "different from conventional finance in form and formalities rather than substance", and "may even be more expensive" for the income provided than a conventional bond.<ref name=WIWWIE2013:51-2>[[#WIWWIE2013|Khan, ''What Is Wrong with Islamic Economics?'', 2013]]: p.51-2</ref>

===Example===
[[File:Tabreed-sukuk.jpg|thumb|right|500px| Structure of a $100 million ''sukuk'' issued by the Tabreed Financing Corporation in March 2004<ref name=MeGIFLEP2006:6-7>[[#MeGIFLEP2006|El-Gamal, ''Islamic Finance'', 2006]]: p.6-7</ref>]]
An example of a sukuk was a $100 million security used to finance the construction and delivery of cooling plants in [[Abu Dhabi]].<ref name="slides">{{cite web|url=https://www.slideshare.net/CamillePaldi/the-tabreed-sukuk|title=Tabreed Sukuk|date=18 June 2015|last1=Paldi|first1=Camille|access-date=14 March 2017}}</ref> This sukuk had an istisna'a and ijara structure and was issued by the Tabreed Financing Corporation (or National Central Cooling Company PJSC) in March 2004.
* Tabreed created an SPV (incorporated in the Cayman Islands), which sold certificates of sukuk bonds.
* With the proceeds of this sale it bought some partially completed central cooling plants ("assets" held in trust for the sukuk).<ref name="slides" /> (1)
* The SPV leased the trust assets to the Tabreed (2)
* which made rental payments to the SPV (3)
* which passed the payments on to sukuk holders (4).
* When the sukuk matured the trust assets are bought back from the SPV and the sukuk holders got their principal back.

If some "dissolution event" (e.g. destruction of the leased property) had interrupted the payment of rent this would have prompted "the continuation of payments in the form of repurchase price". This reduced the risk structure of the sukuk to that (or near that) of conventional bonds, which permits the sukuk to earn the same or close to the same credit ratings that conventional bonds earn. Consequently, they are able to be sold at an interest rater lower than they might otherwise, although their transactions costs are higher than conventional bonds because of the creation of SPVs, as well as payment of various jurist and legal fees for structuring the bond issuance.<ref name=MeGIFLEP2006:6-7/>

==Challenges, criticism and controversy==
===Challenges===
According to a 2015 IMF report, the supply of Sukuk, "falls short of demand" and, with some exceptions "issuance takes place without a comprehensive strategy to develop the domestic market".
<blockquote>Sukuk are seen as well-suited for infrastructure financing because of their risk-sharing property could also help fill financing gaps.  National authorities should, therefore, focus on developing the necessary infrastructure, including promoting true securitization and enhanced clarity over investors' rights, and on stepping up regular sovereign issuance to provide a benchmark for the private sector. Increased sovereign issuance should be underpinned by sound public financial management.<ref name=imf-2015/></blockquote>

"Key challenges" to the Islamic finance industry as a whole—including sukuk—as of 2016 include (according to the [[#SGIER2015-6|''State of the Global Islamic Economy Report'', 2015/16]] and the [[International Monetary Fund|IMF]]) are
* "Low levels" of awareness and understanding of Islamic finance products and services among the public, leading them to not buy;<ref>"What customers want; Customer insights to inform growth strategies of Islamic banks in the Middle East", PwC, October 2014</ref><ref name=SGIER2015-6:70/>
* A "scarcity of Shariah-compliant [[monetary policy]] instruments" and a lack of understanding of "the monetary transmission mechanism"<ref name=imf-2015>"[https://www.imf.org/external/pubs/ft/sdn/2015/sdn1505.pdf Islamic Finance: Opportunities, Challenges, and Policy Options]", IMF, April 2015, p.6-7</ref>
* "Complex financial products and corporate structures" in some countries/jurisdictions because  "regulatory and supervisory frameworks" do not "address the unique risks of the industry".  Consequently, what is needed is "increased regulatory clarity and harmonization, better cooperation between Islamic and conventional financial standard-setters, and further improvement of supervisory tools".<ref name=imf-2015/>
* "Underdeveloped" safety nets and resolution frameworks. In many places these include complete Islamic deposit insurance systems where premiums are invested in Shariah-compliant assets, or Shariah-compliant "[[Lender of last resort|lenders-of-last-resort]]".<ref name=imf-2015/><ref name=SGIER2015-6:70/>
* Regulators who "do not always have the capacity (or willingness) to ensure Shariah compliance."<ref name="SGIER2015-6:70">[[#SGIER2015-6|''State of the Global Islamic Economy Report'', 2015/16]]:70</ref>

;Defaults
In three years during and following the [[2008 financial crisis]]—2008, 2009, 2010—there were at least 21 substantial sukuk defaults,<ref name="Khnifer 2001:25">{{cite journal |date=2011 |title=Shocking: 21 defaulted sukuk cases in the last 20 months! |journal=Business Islamica Magazine |pages=24–6 |ssrn=1712056 }}</ref>
and several large near defaults such as that of [[Dubai World#2009 debt standstill|Dubai World]] saved by a $10 billion loan from [[Abu Dhabi]]<ref name=FKIBP2015:109>[[#FKIBP2015|Khan, ''Islamic Banking in Pakistan'', 2015]]: p.109</ref><ref name="Warde 2011">{{cite web|last1=Warde |first=I. |title='Ibrahim Warde presentation' Panel on Islamic Finance: Bankruptcy, Financial Distress and Debt Restructuring, Islamic Finance workshop |publisher=Harvard Law School|year=2011 |url=http://ifpprogram.com/login/view_pdf/?file=Bankruptcy_Panel.pdf&type=lectures |access-date=14 June 2017}}</ref> As of 2009, there were a number of cases where the ''sukuk'' had defaulted or were in serious trouble.<ref name=McFarlane_2009:24>MacFarlane, Isla. 2009. Sukuk slide. ''Islamic Business and Finance'', 43 (June), p.24 http://cpifinancial.net</ref> In May 2009, Investment Dar of Kuwait defaulted on $100 million ''sukuk''. Saad Group set up a committee to restructure $650 million Golden Belt 1 ''sukuk''. Standard & Poor's cut the rating of that ''sukuk'' "owing to the non-availability of vital information".<ref name=McFarlane_2009:24/>
Another source (Mushtak Parker) claims there "have been a mere three or four" sukuk defaults—East Cameron sukuk in Louisiana (a dispute relating to the profit-sharing arrangement of the instrument); the Investment Dar sukuk (to do with "cash flow problems of the company and its subsidiaries, albeit it had a side dispute with an investor, Blom Bank relating to the shariah aspects of the contracts"); and the "notorious" Saad/Al Gosaibi sukuk default ("more a [[market failure]] and an internecine dispute between the two Saudi partners").<ref name="Parker-NST-20-6-2017">{{cite news|last1=Parker|first1=Mushtak|title=Lessons from Dana Gas 'Sukuk' debacle|url=https://www.nst.com.my/opinion/columnists/2017/06/250653/lessons-dana-gas-sukuk-debacle|access-date=9 November 2017|agency=New Straits Times|date=20 June 2017}}</ref>

;Protection from originator's default
At least one of the three major bond rating agencies for the US has indicated doubts about the "validity" of transfer of assets from the originator in sukuk in the "event of an insolvency of the originator" and attempts by creditors to seize the assets. "Fitch has not reviewed any transaction to date that would satisfy these requirements."<ref name=FKIBP2015:108/>

Underscoring Fitch's concern was the bankruptcy of East Cameron Partners ECP which issued a multiple-award-winning sukuk in 2006 but filed for bankruptcy in October 2008, prompting a legal dispute about the creditors' right to $167.67 million in ''sukuk'' assets.<ref name=McFarlane_2009:24/> (The final decision of the case "did not clearly resolve this issue".)<ref name=FKIBP2015:108/> Another major rating agency, S&P, downgraded the sukuk of Dubai Islamic bank and Sharjah Islamic Bank.<ref>[http://www.oxfordbusinessgroup.com/news/bond-issuances-set-continue-sharjah-year Bond issuances set to continue in Sharjah this year]| Oxford Business Group |29 March 2017</ref>

According to Ibrahim Warde as of 2010,
<blockquote>What is till unclear is what happens to sukuk when they fail—an issue that has not been tested in court. In Malaysia, some sukuk issues have junk status, and two other sukuk are already in default: the Easter Cameron Gas company in the United States and Investment Dar of Kuwait. One of the unresolved questions is whether sukuk holders should stand in the line of creditors or in the line of the owners of underlying assets.<ref name=Warde_2010_152>Warde, Ibrahim. 2000, 2010. ''Islamic finance in the global economy'', Edinburgh: Edinburgh University Press. p.152</ref></blockquote>

In reviewing cases of sukuk defaults and bankruptcies, Muddassir Siddiqui complained that: <blockquote>Through reading many cases that have so far been litigated in courts around the world, I have found that in almost all cases, the courts have struggled to reconcile the substance and form of the contract. Was it a sale, lease, construction or partnership contract or a financing arrangement between the parties?<ref name="siddiqui 2011">{{cite web |first1=Muddassir |last1=Siddiqui  |url=http://ifpprogram.com/login/view_pdf/?file=Bankruptcy_Panel.pdf&type=lectures |title=Panel on Islamic Finance: Bankruptcy, Financial Distress and Debt Restructuring, Harvard Law School, Muddassir Siddiqui comments|date=26 September 2011 |access-date=14 June 2017}}</ref></blockquote>

According to Rodney Wilson, when sukuk payments are delayed or fail, "the means of redress are potentially more complex than for conventional notes and bonds". In particular "under Shari’ah leniency towards debtors is favoured", which inevitably raises [[moral hazard]] problems.<ref name=RD>{{cite journal|last1=Wilson|first1=Rodney|title=Sukuk Defaults: Islamic Debt Investors Need Better Data|journal=World Economics|date=February 2013|url=http://www.worldeconomics.com/papers/Sukuk%20Defaults%20lIslamic%20Debt%20Investors%20Need%20Better%20Data_435d6ca7-d1ab-4ab1-afe1-b108784cc835.paper|access-date=6 August 2015}}</ref>

;Discrediting Sharia compliance
There have been at least two cases of companies seeking to [[Debt restructuring|restructure their debt]] (i.e. pay creditors less), claiming that debt they had issued was not in compliance with sharia.<ref name="Sharif-6-17"/> In a 2009 court filing Investment Dar, a Kuwaiti company claimed a transaction "was taking deposits at interest".<ref name="Sharif-6-17"/>

In June 2017, an independent gas company (Dana Gas PJSC) declared two of its sukuk—with a total worth of $700 million—no longer [[sharia]] compliant,<ref name="Sharif-6-17">{{cite web|last1=Sharif|first1=Arif|title=Why Everyone's Talking About Dana Gas's Sukuk |url=https://www.bloomberg.com/news/articles/2017-06-15/dana-gas-s-move-to-void-sukuk-stuns-analysts-who-question-motive|website=Bloomberg Markets|access-date=9 November 2017|date=15 June 2017}}</ref><ref name="Parker-NST-20-6-2017"/> and offered to exchange the sukuk with a new one which would pay "less than half of the current profit rates and without a conversion feature".<ref name="Parker-NST-20-6-2017"/><ref name="Sharif-6-17"/> The Sukuk were issued in 2013 and due to mature on 30 October 2017.  Dana refused to make payments on them, alleging that "changes in Islamic finance over recent years have made the bonds unlawful in the UAE".<ref name="Reuters-4-10-2017"/> A month earlier, Dana had announced plans to restructure the debt, stating it needed to "focus on short to medium-term cash preservation."<ref name="Sharif-6-17"/>
Sukuk holders, represented by fund manager [[BlackRock]] and [[Deutsche Bank]], have been arguing against Dana in a London High Court.  In October 2017, a court in the emirate of Sharjah in the UAE—where Dana had filed for protection—postponed a ruling on the sukuk.<ref name="Reuters-4-10-2017">{{cite news|title=UAE court postpones judgment at Dana Gas sukuk hearing – source |url=https://www.reuters.com/article/dana-gas-sukuk/uae-court-postpones-judgment-at-dana-gas-sukuk-hearing-source-idUSL8N1MF4WT |access-date=9 November 2017|work=Reuters|date=4 October 2017}}</ref> The issue has been called "one of the greatest challenges that the Islamic finance industry has faced in recent times",<ref name="Dewar-9-17">{{cite web|last1=Dewar|first1=John|last2=Hussain|first2=Munib |title=ISLAMIC FINANCE: CHALLENGES AND OPPORTUNITIES|url=https://www.expertguides.com/articles/islamic-finance-challenges-and-opportunities/arjypfmi |website=Expert Guides|access-date=9 November 2017|date=18 September 2017}}</ref> but the idea that the case is "a blow to Islamic finance" has also been dismissed as "poppycock".<ref name="Parker-NST-20-6-2017"/>

===Criticism and controversy===
Sukuk have been criticized as evading the restrictions on ''[[riba]],''<ref name="WIWWIE2013:306-7"/><ref name=Warde_2010_151>Warde, Ibrahim. 2000, 2010. ''Islamic finance in the global economy'', Edinburgh: Edinburgh University Press. p.151</ref><ref name=Salman_Ali_2008-9>Ali, Salman S. 2008. Islamic capital market: Current State and developmental challenges. Introduction of ''Islamic capital markets: Products, regulation and development'', ed. Salman Syed Ali, p.9, Jeddah, Islamic Research and Training Institute, Islamic Development Bank.</ref> and imitating conventional bonds.<ref name="MTUS2007:4" /><ref name="MeGIFLEP2006:6" /><ref name="Salman_Ali_2008-10" />

In February 2008, the [[Accounting and Auditing Organization for Islamic Financial Institutions|AAOIFI]]'s board of scholars, led by<ref>{{Cite web|url=http://news.bbc.co.uk/2/hi/business/8401421.stm|title=BBC News – How Sharia-compliant is Islamic banking?|last=Foster|first=John|date=11 December 2009|website=news.bbc.co.uk|language=en-GB|access-date=15 March 2017}}</ref> Sheik [[Taqi Usmani]], stated that as many as 85 percent of sukuk sold to date may not comply with all the precepts of Shariah.<ref name="CHILTON-80%">{{cite web|url=http://emirateseconomist.blogspot.com/2008/03/80-of-islamic-bonds-declared-unislamic.html|title=80% of Islamic bonds declared unIslamic|date=22 March 2008|website=The Emirates Economist|last1=Chilton|first1=John B.|access-date=15 March 2017}}</ref> In a paper entitled "Sukuk and their Contemporary Applications" released in November 2007,<ref name="MTUS2007:">[[#MTUS2007|Usmani, ''Sukuk and their Contemporary Applications'', 2007]]:</ref> Usmani identified the following three key structuring elements that differentiate Sukuk from conventional bonds:<ref name="MTUS2007:3-4" />
* Sukuk must represent ownership shares in assets or commercial or industrial enterprises that bring profits or revenues
* Payments to Sukuk-holders should be the share of profits (after costs) of the assets or enterprise
* The value payable to the Sukuk-holder on maturity should be the current market value of the assets or enterprise and not the principal originally invested.

Usmani stated that by complex mechanisms Sukuk had taken on the same characteristics as conventional interest-bearing bonds, as they do not return to investors more than a fixed percentage of the principal, based on interest rates, while guaranteeing the return of investors' principal at maturity.<ref name="MTUS2007:4">[[#MTUS2007|Usmani, ''Sukuk and their Contemporary Applications'', 2007]]:4</ref> Usmani's estimate that 85% of all Sukuk in issuance were not Shariah-compliant was based on the existence of guaranteed returns and/or repurchase obligations from the issuer—a violation of shariah.

Following Usmani's criticisms the global sukuk market shrunk from US$50 billion in 2007 to approximately $14.9 billion in 2008,<ref>{{cite news|url=https://www.reuters.com/article/idUSLS10157820090128|title=Gulf sukuk market revival seen unlikely in 2009|date=28 January 2009 |publisher=Reuters|author=Frederik Richter}}</ref> although how much of this was due to his criticisms<ref>{{cite news |url=http://www.arabianbusiness.com/islamic-bond-market-wrecked-by-critical-remarks-83923.html|title=Islamic bond market "wrecked" by critical remarks|date=29 October 2008|publisher=Arabian Business|author=Jason Benham}}</ref> or the [[2008 financial crisis]] is a matter of debate.<ref>{{cite news|url=https://www.reuters.com/article/idUSTRE53C0ZX20090415|title=Scholar critique spurs ijara Islamic bond|date=15 April 2009|publisher=Reuters|author=Daliah Merzaban}}</ref>

The ''[[Financial Times]]'' has described this as an "ongoing" debate over "form versus substance"  in Islamic finance, identifying two kinds of sukuk—"asset-backed" sukuk and the more numerous, less strict, allegedly non-compliant  "asset based" sukuk.  In "asset-backed" sukuk there is "a true sale between the originator and the [[Special-purpose entity|special purpose vehicle]] (SPV) that issues the sukuk and sukuk holders do not have recourse to the originator".  Asset prices may vary over time. In contrast  "asset-based" sukuk <nowiki>''</nowiki>do<nowiki>''</nowiki> give their holders recourse to the originator, and so more closely resemble conventional bonds.<ref name=":3" />

Other critics include non-orthodox economist Mahmoud El-Gamal, who has complained that while providers of sukuk (and other Islamic finance instruments) will often describe their "distinguishing feature" as the "prohibition of interest", they will then <blockquote>proceed to report the interest rate that Islamic instruments pay. For instance, Reuters' 13 August 2002, coverage of Bahrain's $800 million sukuk ... followed their characterization of Islamic financial products as "[[interest-free]]" with a report that those sukuk will pay "4 percent annual profit".<ref name="MeGIFLEP2006:2">[[#MeGIFLEP2006|El-Gamal, ''Islamic Finance'', 2006]]: p.2</ref></blockquote>
He also complains that despite claims that sukuk—unlike conventional bonds—share the risk of their underlying asset and may increase or decrease in value, in sukuk such as the Tabreed sukuk mentioned above, steady payment of "rent" is written into the sukuk contract giving them a risk structure "essentially" the same as conventional bonds.<ref name="MeGIFLEP2006:6">[[#MeGIFLEP2006|El-Gamal, ''Islamic Finance'', 2006]]: p.6</ref>

Another observer, Salman Ali, found that many of the ''sukuk'' structures "do not conform to the ''Shariah''".<ref name="Salman_Ali_2008-9" /><ref name="WIWWIE2013:306-7" /> According to Ali, while most of the sukuk make an effort to remain "within Shariah bounds", they "replicate conventional debt instruments". They often combine more than one contract, "which individually may be ''Shariah''-compliant" but when combined "may defeat the objective of the shariah". Furthermore, the sukuk rate of return is often "tied" to the Libor (London interbank offered rate) or Euribor (euro interbank offered rate) interest rate "rather than to the underlying business" that the sukuk is financing. This makes the sukuk "so similar to conventional debt instruments that it is difficult to tell one from the other". Ali believes this may be why rating agencies such as Standard & Poors and Moody's apply the same methodology for rating sukuk as for conventional debt instruments.<ref name="Salman_Ali_2008-10">Ali, Salman S. 2008. Islamic capital market: Current State and developmental challenges. Introduction of [https://uaelaws.files.wordpress.com/2012/05/islamiccapitalmarkets-products-regulation-development.pdf ''Islamic capital markets: Products, regulation and development''], ed. Salman Syed Ali, pp.10, Jeddah, Islamic Research and Training Institute, Islamic Development Bank.</ref>

In 2011, Safari<ref>Safari, Meysam (2011), "Are Sukuk Securities the Same as Conventional Bonds?", Proceedings of Foundation of Islamic Finance Series, Second Conference, Kuala Lumpur, Malaysia, 8–10 March 2011, Accessible at https://ssrn.com/abstract=1783551</ref> conducted various statistical and econometrics tests to check the argument that sukuk securities are merely the same as conventional bond. However, his results on the comparison of [[yield to maturity]] of sukuk and that of conventional bonds show that sukuk securities are different from conventional bonds. In response to this argument, it was pointed out that yield to maturity reflects the interplay of supply and demand which may be affected by a financial product's packaging and target market rather than just the substance of the product alone.<ref>Kayali, Rakaan (2015), "Sukuk on Trial", Practical Islamic Finance, 19 May 2015, Accessible at https://foundationsforislamiceconomics.wordpress.com/2015/05/19/sukuk-on-trial/</ref> In 2011 [[Goldman Sachs#Controversies|Goldman Sachs]] abandoned a $2 billion sukuk programme it had registered with the [[Irish Stock Exchange]], after some analysts stated that its sukuk "might violate Islamic bans on interest payments and monetary speculation" (in 2014 it successfully drew about $1.5 billion in orders for the five-year sukuk).<ref>{{Cite news|url=https://www.reuters.com/article/goldman-sukuk-launch-idUSL6N0RH2RH20140916|title=UPDATE 1-Goldman Sachs gets strong demand for landmark sukuk issue|date=16 September 2017|work=Reuters|access-date=24 March 2017}}</ref>

==Countries using Sukuk==

=== Bahrain ===
Bahrain is a major issuer of sukuk.

=== Bangladesh ===
In August 2020, Bangladesh Bank took initiatives to implement sukuk with the help of national private Islamic banks.

=== Brunei ===
Starting in 2006 the Brunei Government issued short-term Sukuk Al-Ijarah securities. As of 2017 they have issued B$9.605 billion worth.<ref name="Sukuk.com-burnei-2017">{{cite web|title=Brunei Darussalam April 2017|url=https://www.sukuk.com/sukuk-new-profile/brunei-darussalam-april-2017-4869/|website=Sukuk.com|access-date=19 March 2017}}</ref>

=== Egypt ===
On 8 May 2013, Egyptian President [[Muhammad Morsi]] approved a law allowing the government to issue sukuk, however as of May 2013 the relevant regulations have not been specified and this law has been replaced by amending some new articles in the capital market law and its executive regulations. As of 2016 the Egyptian government stated it would use "innovative financial tools for the implementation of government projects", such as Sukuk.<ref name="DNE-2016">{{cite news|last1=El-Din|first1=Mohamed Alaa|title=Government adopts new financial instruments to implement national projects, including Sukuk|url=http://www.dailynewsegypt.com/2016/02/24/government-adopts-new-financial-instruments-to-implement-national-projects-including-sukuk/|access-date=19 March 2017|agency=Daily News Egypt|date=24 February 2016}}</ref>

=== Gambia ===
In 2007, Gambia replaced Sudan as one of the ten countries issuing sukuk. It has one of the lowest amount of sukuk issuance, with $12.6 mil as of 2008.

=== Indonesia ===
According to islamicfinance.com, at end-2013 outstanding stock in Indonesia's sukuk market was US$12.3 billion, with growth coming driven from the government sector.<ref name="SMI">{{cite web|title=The Sukuk Market in Indonesia|url=https://www.islamicfinance.com/2015/01/sukuk-market-indonesia/|website=islamicfinance.com|access-date=19 March 2017|date=13 January 2015}}</ref>

=== Iran ===
{{Further|Banking in Iran#Sukuk}}
Although the first use of Islamic financial instruments in Iran goes back to 1994 with the issuance of [[Islamic banking#Musharakah (joint venture)|Musharakah]] sukuk by [[Tehran]] Municipality to finance Navab project, the enactment of Iran securities market law, and new instruments and financial institutions development law was done respectively in 2005 and 2010 to pave the way for the appliance of such instruments to develop financial system of the country. The first [[Islamic banking#Ijarah|Ijarah]] sukuk was issued in Iranian Capital Market in January 2011 for financing [[Mahan Air]] company with the value of 291,500 million [[Iranian rial|Rials]].<ref>[https://web.archive.org/web/20140924010104/http://english.sukuk.ir/index.php/about-sukuk/sukuk-differences/ijarahsukuk sukuk-differences/ijarahsukuk]</ref><ref>{{cite news|last1=Kalhor|first1=Navid|title=Iran's private sector having hard time financing expansion  |url=http://www.al-monitor.com/pulse/originals/2017/03/iran-private-sector-financing-bond-market-challenges.html |access-date=10 April 2017|agency=Al Monitor|date=3 March 2017}}</ref>

=== Malaysia ===
More than half of sukuk issued worldwide are in [[Malaysian ringgit]], with the United States dollar coming second.<ref name="imf-2015-14" /> Malaysia is one of the few countries that makes it mandatory for sukuk and other debt papers to be rated.<ref name=RAM>[http://www.gulfbase.com/news/malaysia-to-maintain-stronghold-in-global-sukuk-market/228975 "Malaysia to maintain stronghold in global sukuk market, says RAM"], '' [[The Sun (Malaysia)|The Saun Daily]]'', Malaysia, 12 February 2013</ref> RAM Rating Services Bhd CEO Foo Su Yin says the total issuance of sukuk corporate bonds in 2012 was RM 71.7 billion while conventional bonds totalled RM48.3 billion.<ref name=RAM /> As at 2011, Malaysia was the highest global sukuk issuer by issuing 69 percent of world's total issuances.<ref name="qatar2013">{{cite news|title=Asian demand to drive Qatar sukuk|url=http://investvine.com/asian-demand-to-drive-qatar-sukuk/|access-date=10 January 2013|date=9 January 2013|publisher=Investvine.com}}</ref>

=== Kazakhstan ===
In June 2012, [[Kazakhstan]] finalized its debut sukuk which will be issued by the Development Bank of Kazakhstan (DBK) in the Malaysian market. The DBK, which is 100% owned by the government of Kazakhstan, is working with HSBC and Royal Bank of Scotland (RBS) to manage the ringgit-denominated issuance which is effectively a quasi-sovereign offering. The issuance will be listed on the [[Kazakhstan Stock Exchange]], which has developed the infrastructure to list Islamic financial products such as ''Ijara'' and ''Musharaka Sukuk'' and investment funds.<ref>{{cite news|title=Kazakhstan Finalizing its DBK Sukuk Introduction |url=http://www.satrapia.com/news/article/kazakhstan-finalizing-its-dbk-sukuk-introduction/|access-date=20 July 2012|newspaper=The Gazette of Central Asia|date=11 June 2012|publisher=Satrapia}}</ref>

=== Kyrgyzstan ===
Kyrgyzstan introduced sukuk into its securities law in 2016, but the first sukuk (a privately placed ''[[Mudarabah]]'' sukuk) was only issued in 2023,<ref>{{Cite news |title=First Islamic securities issued in Kyrgyzstan |work=Eurasian Observer |url=https://eurasianobserver.com/first-islamic-securities-issued-in-kyrgyzstan/}}</ref> followed by a number of issues of ''Sukuk al-Wakalah Bi Al-Istithmar'', an investment agency certificate. Kyrgyzstan’s government set a goal to make the Kyrgyz Republic an Islamic finance hub.<ref>{{Cite news |title=Кабмин предлагает сделать Кыргызстан региональным центром по исламской экономике |work=24KG |url=https://24.kg/vlast/248470_kabmin_predlagaet_sdelat_kyirgyizstan_regionalnyim_tsentrom_poislamskoy_ekonomike/}}</ref>

=== Kuwait ===

=== Pakistan ===
Pakistan issued a sukuk of $1 billion to fund a trade deficit with a yield of 5%.<ref>[http://www.khaleejtimes.com/business/banking-finance/pakistan-issues-1b-five-year-sukuk-bonds-to-fill-trade-gap Pakistan issues $1b five-year sukuk bonds to fill trade gap] | M. Aftab| Khaleej Times |8 October 2016</ref>

=== Qatar ===
Qatar authorities and government related companies are looking into funding for its infrastructure projects by issuing Sukuk. In 2011 Qatar issued 11 percent of global Sukuk.<ref name="qatar2013"/>

=== Saudi Arabia ===
Saudi Aramco, A Saudi Arabian national petroleum and natural gas company, issued its first ever Sukuk on 6 April 2017. Raising approximately 11.25bn Riyals ($3bn), the move was prompted as a response to the low oil prices.

Later in the same month, the Saudi government raised US$9 billion in sukuk. Half were five-year sukuk with 100 basis point [[swap spread]] and the other half had a ten-year tenor with 140 basis point spread.<ref>{{cite news|title=Saudi Arabia Raises $9 Billion with Inaugural Islamic Bond|url=https://www.bloomberg.com/news/articles/2017-04-12/saudi-arabia-raises-9-billion-in-inaugural-islamic-bond-sale|date=12 April 2017|publisher=[[Bloomberg L.P.|Bloomberg]]}}</ref> In September 2017, the government sold further domestic sukuk worth 7 billion riyals (US$1.9 billion)<ref name=bloomberg_saudi_domestic>{{cite news|title=Saudi Arabia Raises $1.9 Billion From Islamic Bond|url=https://www.bloomberg.com/news/articles/2017-09-19/saudi-arabia-raises-1-9-billion-from-three-part-sukuk-offering|date=18 September 2017|publisher=[[Bloomberg L.P.|Bloomberg]]}}</ref> and another 4.77 billion riyals (US$1.27 billion) were sold in December.<ref>{{cite news|url=https://www.thenational.ae/business/economy/saudi-arabia-re-taps-10bn-riyal-october-domestic-sukuk-issue-1.690185|title=Saudi Arabia re-taps 10bn riyal October domestic sukuk issue|date=24 December 2017|publisher=[[The National (Abu Dhabi)|The National]]|location=Abu Dhabi}}</ref> These combined five-year sukuks priced at 2.75%, seven-year ones at 3.25%, and a ten-year tranche at 3.45%.<ref name=bloomberg_saudi_domestic/>

=== Singapore ===
Singapore was the first non-Muslim majority country to issue a Sovereign Sukuk in 2009. Called the MAS Sukuk domestically, it is issued via a wholly owned subsidiary of the Monetary Authority of Singapore—Singapore Sukuk Pte Ltd. The Singapore MAS Sukuk is treated similarly to the conventional Singapore Government Securities ("SGS") in aspects such as compliance with liquidity requirements.

Since then there have been several Sukuk issuances in Singapore by local and foreign issuers. Singapore City Development Limited issued the first Ijara Sukuk in 2009, and Khazanah Shd Bhd issued a SGD1.5 billion Sukuk in 2010 to finance its acquisition of parkway holdings. In 2013, there were 2 new Sukuk Programmes arranged for Singapore listed companies—Swiber Holdings & Vallianz Holdings, with the former issuing a SGD150 million 5-year sukuk in Aug 2013.

=== Somalia ===
The [[Somalia Stock Exchange]] (SSE) is the national [[Stock exchange|bourse]] of [[Somalia]].<ref name="Dtssfsm">{{cite news |title=Diplomat to start Somalia's first stock market|url=https://www.reuters.com/article/kenya-somalia-investment-idUSL6E8J8D1J20120808|access-date=5 December 2013|newspaper=Reuters|date=8 August 2012}}</ref> In August 2012, the SSE signed a Memorandum of Understanding to assist it in technical development. The agreement includes identifying appropriate expertise and support.<ref name="Dtssfsm"/><ref name="Nseptotosiji">{{cite news|last=Minney|first=Tom|title=Nairobi Securities Exchange plans to offer 38% of shares in June IPO|url=http://www.africancapitalmarketsnews.com/news-stories/stock-exchanges-news/|access-date=19 May 2014|newspaper=AfricanCapitalMarketsNews.com|date=14 May 2014|archive-date=10 April 2019|archive-url=https://web.archive.org/web/20190410104151/http://www.africancapitalmarketsnews.com/news-stories/stock-exchanges-news/|url-status=dead}}</ref> [[Sharia]] compliant sukuk bonds and [[halal]] [[Stock|equities]] are also envisioned as part of the deal as the nascent stock market develops.<ref name="Dtssfsm"/>

=== Turkey ===
Turkey issued its debut sukuk in October 2012. The October 2012 issuance was a double issuance, with one being in US Dollars (issued on [http://www.sukuk.com/sukuk-new-profile/hazine-mustesarligi-varlik-kiralama-1073 10 October 2012 for $1.5B]), and one being in Turkish Lira (issued on [http://www.sukuk.com/sukuk-new-profile/turkey-2015-1072 2 October 2012 for 1.62LRY]). According to data from Sukuk.com, the US Dollars issuance was oversubscribed and was initially planned to be for $1 billion, but because of strong demand from the Middle East it was increased to $1.5 billion.<ref>[http://www.sukuk.com/article/delay-uk-sukuk-attractive-gcc-south-east-asian-investors-2-1155/ Delay in UK Sukuk may make it more attractive for GCC and South East Asian Investors]| Naveed Mohammed |sukuk.com |18 April 2014</ref>

Turkey returned to the Sukuk market in [http://www.sukuk.com/sukuk-new-profile/hazine-mustesarligi-varlik-kiralama-anonim-sirketi-1074 October 2013 with a $1.25B issuance].

=== United Arab Emirates ===
As of January 2015, [[NASDAQ Dubai]] has listed 18 sukuk valued at a total $24 billion. The latest of these is [[Fly Dubai]].<ref>[http://www.khaleejtimes.com/biz/inside.asp?xfile=/data/market/2015/January/market_January22.xml&section=market Flydubai's $500m sukuk listed on Nasdaq Dubai] |Khaleej Times |16 January 2015</ref> The UAE has also attracted Western investment in the form of [[GE]], which sold a 5-year, $500 million sukuk in 2009,<ref name="Uppal-2009">{{cite news|last1=Uppal|first1=Rachna|last2=Carvalho |first2=Stanley |title=UPDATE 1-US' GE Capital raises $500 mln in debut Islamic bond|url=https://www.reuters.com/article/gecapital-bonds-idUSLJ41775120091119 |access-date=13 March 2017|work=Reuters|date=19 November 2009}}</ref> and investment banker [[Goldman Sachs]], which became first conventional U.S. bank to issue sukuk in 2014.<ref>{{cite news|last1=Narayanan|first1=Archana|title=UPDATE 1-Goldman Sachs gets strong demand for landmark sukuk issue|url=https://www.reuters.com/article/goldman-sukuk-launch-idUSL6N0RH2RH20140916|access-date=13 March 2017|work=Reuters|date=16 September 2014}}</ref><ref name=FJIFD2012:207>[[#FJIFD2012|Jamaldeen, ''Islamic Finance For Dummies'', 2012]]:207</ref>

=== United Kingdom ===
On 25 June 2014, [[HM Treasury]] became the first country outside of the Islamic world to issue a sukuk. This £200 million issue was 11.5 times oversubscribed and was priced at the same level as the equivalent UK Gilts (UK government bonds) at 2.036% pa.<ref>[https://www.gov.uk/government/news/government-issues-first-islamic-bond Government issues first Islamic bond] Britain becomes the first country outside the Islamic world to issue sovereign Sukuk.| gov.uk HM Treasury |25 June 2014</ref> The Sukuk was linked to the rental income of UK government property.

=== Hong Kong ===
Hong Kong has issued two sovereign Sukuk as of middle of 2015. It issued its first issuance consisting of a 5-year $1 billion Ijara Sukuk in September 2014 offering a profit rate of 2.005%.<ref name=sukuk>{{cite news| url=http://www.sukuk.com/sukuk-new-profile/hong-kong-sukuk-2014-limited-2654/ | work=Sukuk | title=Hong Kong Sukuk Issuance of 2014 | date=11 September 2014 | first=Naveed | last=Mohammed}}</ref> It issued its second sovereign Sukuk in June 2015 also for $1 billion with a 5-year maturity which used an innovative Wakala structure offering a profit rate of 1.894%.<ref name="HK Sukuk 2015">{{cite news| url=http://www.sukuk.com/sukuk-new-profile/hong-kong-sukuk-2015-limited-4292/ | work=Sukuk | title=Hong Kong Sukuk Issuance of 2015 | date=3 June 2015 | first=Naveed | last=Mohammed}}</ref>

==See also==
* [[Islamic financing|Islamic banking and financing]]
* [[Murabaha]]
* [[Profit and loss sharing]]
* [[Gemach]]

===Notes===
{{reflist|group=Note}}
{{notelist}}

==References==
{{reflist}}

=== Sources ===
* {{Cite book |url=http://iugc.yolasite.com/resources/Reference%20Book%2004%20-%20Islamic%20finance,%20law%20economics%20and%20practice,%20M.%20El%20Gamal.pdf |title=Islamic Finance : Law, Economics, and Practice |last=el-Gamal |first=Mahmoud A. |publisher=Cambridge |year=2006 |isbn=9780521864145 |location=New York, NY |ref=MeGIFLEP2006 |access-date=9 March 2017 |archive-date=3 April 2018 |archive-url=https://web.archive.org/web/20180403160351/http://iugc.yolasite.com/resources/Reference%20Book%2004%20-%20Islamic%20finance,%20law%20economics%20and%20practice,%20M.%20El%20Gamal.pdf |url-status=dead }}
* {{Cite book|url=https://books.google.com/books?id=T7ImTjBd1gQC|title=Islamic Finance For Dummies |last=Jamaldeen|first=Faleel |date=2012 |publisher=John Wiley & Sons |isbn=9781118233900|language=en|ref=FJIFD2012}}
* {{Cite book|last=Khan|first=Feisal|url=https://books.google.com/books?id=dqlACwAAQBAJ&pg=PA80|title=Islamic Banking in Pakistan: Shariah-Compliant Finance and the Quest to Make Pakistan More Islamic |date=22 December 2015 |publisher=Routledge |isbn=9781317366539 |language=en |access-date=9 February 2017 |ref=FKIBP2015}}
* {{cite book|last1=Khan|first1=Muhammad Akram|title=What Is Wrong with Islamic Economics?: Analysing the Present State and Future Agenda |date=2013|publisher=Edward Elgar Publishing|url=https://books.google.com/books?id=Fr36Gd1X_rcC&pg=PA178 |access-date=26 March 2015|ref=WIWWIE2013|isbn=9781782544159}}
* {{Cite journal|last1=Saeed|first1=A. |last2=Salah|first2=O. |year=2014|orig-year=2013 |title=Development of Sukuk: Pragmatic and Idealist Approaches to Sukuk Structures |url=http://www.debrauw.com/wp-content/uploads/NEWS%20-%20PUBLICATIONS/Development-Sukuk-Pragmatic-and-Idealist-Approaches-to-20-Sukuk-20Structures.pdf |journal=Journal of International Banking Law and Regulation|issue=1 |pages=41–52|access-date=18 March 2017 |ref=SSDoS2014}}
* {{cite book |publisher=Thomson Reuters & Dinar Standard |title=State of the Global Islamic Economy Report 2015/16 |url=http://www.startupbusiness.it/wp-content/uploads/2016/10/SALAAM03102016111130.pdf |access-date=19 March 2017 |ref=SGIER2015-6}}
* {{cite book|last=Usmani|first=Muhammed Taqi|title=Sukuk and their Contemporary Applications|publisher=AAOIFI|date=November 2007 |url=http://www.pdftop.com/view/aHR0cDovL3d3dy5mYWlsYWthLmNvbS9kb3dubG9hZHMvVXNtYW5pX1N1a3VrQXBwbGljYXRpb25zLnBkZg== |ref=MTUS2007}}
{{Islamic banking and finance}}
{{Islam topics|state=collapsed}}

[[Category:Islamic banking]]
[[Category:Sharia legal terminology]]
[[Category:Islamic banking and finance terminology]]
[[Category:Bonds (finance)]]