العدد الحالي: نيسان/ أبريل 83-2019       اختر عدد :
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ARE THE SUKUK DIFFERENT FROM CONVENTIONAL BONDS?

is an Arabic word (صكوك), which is used for the Shari`ah-compliant financial securities. The very word Sukuk (صكوك) is the plural of the word 'Sakk' (صك), which literally means certificate, legal instrument or document representing financial obligation or right.

From technical perspectives, many definitions have been coined for Sukuk. Islamic finance experts still seem to tangle with issue of perfectly define the term 'Sukuk'. Nevertheless, some basic components in the definition have been agreed upon by almost all experts. For instance, Sukuk are financial certificates, structured within the permissible framework of Islamic law and associated with an underlying asset. On the other hand, it is observed that Sukuk still have not escaped from the context of conventional bond. The word 'bond' can easily be found in many definitions. For example: a digital dictionary defines Sukuk as: “A financial certificate similar to a bond in Islam that complies with Islamic religious laws of Sharia”. While, QFINANCE Financial Dictionary states:

In Islamic financing, the equivalent of a bond, which represents undivided shares in ownership of tangible assets. Under Islamic law it cannot earn interest

It should be noticed that, although, Sukuk may be seen as alternatives to a conventional bond in practice; however, the underlying concept and structure of Sukuk is entirely different from conventional bonds.

The Sukuk as defined by AAOIFI are versus Conventional Bonds

Conventional bond is fundamentally a loan contract; it does not give the investor a share of ownership in the asset, project or business. It is a contractual debt obligation on the bond issuer for the bond holder. The issuer is obliged to pay back the principal as well as the interest on that principal in the form of coupon payments. In contrast, Sukuk cannot be considered as loan contracts because of the irrevocable prohibition of riba in Islamic law, rather they need to be structured on any Shari`ah compliant exchange contracts, i.e. mudharabah, musharakah, ijarah, istisna', etc. It creates beneficial rights for the Sukuk holder in the underlying asset through undivided ownership over the asset. Hence, it represents participation and investment rights in a particular asset, project or business.

The investment criterion for a conventional bond simply follows only the local legislation. Conversely, the Sukuk should be designed within the permissible boundaries of Shari`ah. Furthermore, the returns of a bond are the interest or coupon payments on the principal amount, since the bond represents a share of debt. On the contrary, the returns for investors in Sukuk investments would be attributed to the underlying contract, share in the asset and the performance of that asset. The stream of cash-flows, which the investor receives, is not fixed. In addition, as the Sukuk holders possess the beneficial ownership rights in the asset through an SPV or SPC, the risk associated with that asset is also transferred to the SPV/SPC, which the Sukuk holders, ultimately have to bear.

The value of a bond at a particular point in time is based on the interest rate required in the market on that bond, which is called the bond’s yield to maturity (YTM). In contrast, it is, in fact, the market value of the underlying asset, which determines the value of Sukuk.

Moreover, a bond can be tradable in a secondary market without being associated with the firm’s assets. Although, Sukuk, by virtue of transfer of ownership of the asset, are also tradable in the secondary market, but might not be tradable in the secondary market when they represent more than one third of the debt to the Sukuk holder. In this case, instead, it can only be held until maturity or sold at par.

Islamic Legal Verdicts for the Issuance of Sukuk

Sukuk estern world, rather to a certain extent to build up innovative types of assets that  

Sale of Debt

As opposed to OIC Fiqh Academy resolutions and AAOIFI’s standards, SAC has allowed the sale of debt in order to develop Islamic capital market.

Rebate

It is allowed to stipulate a provision of rebate in the primary legal document, but it should be noted that such provision cannot be a part of pricing section. By virtue of the introduction of rebate, BBA, Murabaha and Istisna Sukuk can utilize the variable rate mechanism benchmarked to the prevailing market rates.

Compensation

The SAC is also responsible to prescribe the rate of compensation from time to time. This is basically a penalty for the late payment. This compensation is for the delay of payment which cannot be compounded. However, it cannot be applied on the expected profit.