Sukuk: An explanation of what it is
The word sukuk is an Arabic term meaning certificate, legal instrument or cheque. Technicially speaking, the word refers to Islamic bonds. Sukuk is the Islamic alternative to the conventional practice of bonds and is itself a popular financing tool in Malaysia.
For those who are unclear about what a bond is, it is basically a certificate issued by a party, usually a government, sold to investors. Investors will pay a certain amount to get the bond certificate, and the money received by the government will be used for their expenses, and their capital needs. The government will then need to pay the individuals holding the bond certificates, usually every six months or annually in the form of coupon payments. At the end of an agreed term, the issuer will then purchase back the bond by paying the nominal rate (the original price of the certificate) to the investors. The investors make money by receiving not only the nominal, but also the interests collected throughout the term before maturity.
Due to several features of conventional bond that contradicts Islamic teachings, namely fixed interests, sukuk is introduced as an alternative to conventional bonds.
Sukuk in principle is the same as bond, in that an issuer will sell certificates to raise capital. However, sukuk is different in that the holder of sukuk certificate will have an ownership share in the asset of the issuer as well. If the asset increases in value as time passes, then the amount of repayment to the sukuk holder will increase as well. This is not riba' (usury), since it is not fixed and follows the revenue generated by the asset. This is the fundamental difference between sukuk and bonds, while bonds are debt instrument whereby the bonds are merely debt and not based on any underlying asset, sukuk is either asset based or asset backed.
There are several types of sukuk and several ways to categorize them. The one I will use is based on the one recommended by the International Sharia Research Acedemy for Islamic Finance (ISRA), which is categorizing them either as senior unsecured sukuk, subordinated sukuk or secured sukuk.
Senior unsecured sukuk allows for the sukuk holders (the investors) to seek legal recourse only to the sukuk issuers, in the event of any default. That is, if the company goes bankrupt, the investors cannot lay claim to the asset or sell it off to a third party to reclaim losses. This constitutes the majority of the sukuk issued today.
The second is the subordinated sukuk. This is similar to the previous only that the sukuk holders can only claim for their losses in the event of default, only after payments have been made to the senior sukuk holders.
The third is the secured sukuk, which is asset backed. This category of sukuk will allow sukuk holders to claim the asset itself and will be able to sell of the asset to obtain any gains for any losses, and they're also able to have recourse with the issuer.
Another type of sukuk is the asset backed sukuk only, which refers to the sukuk holder only able to seek recourse from the asset itself and not the issuer.
There have been questions raised by many scholars about whether unsecured sukuk is truly sharia compliant. It seems that Islamic finance still has a long way to go in terms of the instruments issued to be mostly free from controversies.
For those who are unclear about what a bond is, it is basically a certificate issued by a party, usually a government, sold to investors. Investors will pay a certain amount to get the bond certificate, and the money received by the government will be used for their expenses, and their capital needs. The government will then need to pay the individuals holding the bond certificates, usually every six months or annually in the form of coupon payments. At the end of an agreed term, the issuer will then purchase back the bond by paying the nominal rate (the original price of the certificate) to the investors. The investors make money by receiving not only the nominal, but also the interests collected throughout the term before maturity.
Due to several features of conventional bond that contradicts Islamic teachings, namely fixed interests, sukuk is introduced as an alternative to conventional bonds.
Sukuk in principle is the same as bond, in that an issuer will sell certificates to raise capital. However, sukuk is different in that the holder of sukuk certificate will have an ownership share in the asset of the issuer as well. If the asset increases in value as time passes, then the amount of repayment to the sukuk holder will increase as well. This is not riba' (usury), since it is not fixed and follows the revenue generated by the asset. This is the fundamental difference between sukuk and bonds, while bonds are debt instrument whereby the bonds are merely debt and not based on any underlying asset, sukuk is either asset based or asset backed.
There are several types of sukuk and several ways to categorize them. The one I will use is based on the one recommended by the International Sharia Research Acedemy for Islamic Finance (ISRA), which is categorizing them either as senior unsecured sukuk, subordinated sukuk or secured sukuk.
Senior unsecured sukuk allows for the sukuk holders (the investors) to seek legal recourse only to the sukuk issuers, in the event of any default. That is, if the company goes bankrupt, the investors cannot lay claim to the asset or sell it off to a third party to reclaim losses. This constitutes the majority of the sukuk issued today.
The second is the subordinated sukuk. This is similar to the previous only that the sukuk holders can only claim for their losses in the event of default, only after payments have been made to the senior sukuk holders.
The third is the secured sukuk, which is asset backed. This category of sukuk will allow sukuk holders to claim the asset itself and will be able to sell of the asset to obtain any gains for any losses, and they're also able to have recourse with the issuer.
Another type of sukuk is the asset backed sukuk only, which refers to the sukuk holder only able to seek recourse from the asset itself and not the issuer.
There have been questions raised by many scholars about whether unsecured sukuk is truly sharia compliant. It seems that Islamic finance still has a long way to go in terms of the instruments issued to be mostly free from controversies.
Comments
Post a Comment