Fund Raising on Sukuk

Overview of Sukuk

What is Sukuk ?

Arabic Word, Plural of the word “Sak”, are certificates of equal value representing after closing subscription, receipt of the value of the certificates and putting it to use as planned, common title to shares and rights in tangible assets, usufruct and services, or equity of a given project or equity of a special investment activity (“Sukuk”).

In the Summary, It is a kind of Bond in which issuance criteria have to comply with ethical & social responsible businesses (Halal) and does not harm society.

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Sukuk Overview
  • Accounting & Auditing Organization for Islamic Financial Institutions (AAOIFI) lays down 14 different types of Sukuk , however the most popular structure is the Sukuk Al Ijara, based on Islamic leasing transaction.
  • A bond is a contractual obligation whereby the issuer is contractually obliged to pay to bondholders, on certain specific dates, interest and principal. Under Sukuk structure, the Sukuk holders each hold an undivided beneficial ownership in the underlying assets. Thus, 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.
  • Not simply a claim to cash flow, but are also certificates evidencing an ownership of an asset or its usufruct and was developed by Shariah experts for the express purpose of answering the financial world’s demand for a Shariah compliant debt instrument.
  • Out of  the 14 types of Sukuk under AAOIFI, the 7 types which are favored in the market are based on Ijara, Salam, Mudaraba, Musharaka, Murabaha, Istisna mode of finance and on the basis of pooled assets/ hybrid Sukuk, wherein these concepts involves entitlement to rights in certain assets inclusive of some degree of ownership.
Sukuk Advantage
  • Theoretically Cheaper funding cost. Normally in other developed and regulated Sukuk markets with the active secondary market, funding cost is cheaper (compared to conventional bonds) as a result of wider investor base.
  • Wider investor base, Both Islamic and conventional institutional investors/ fund managers are able to invest in Sukuk thus resulting in wider investor base.
  • Promotes ethical business conduct, Promotes transparency (eg: on the business & underlying assets), fairness, entrepreneurship and sharing of risks between financiers and customers.
  • Promoting good business practice, Prohibits interest (riba), uncertainty (gharar), Prohibits activities related to vice, alcohol, pork, weapons, Emphasis on profit and loss sharing and asset backing principles.
  • Gaining prominence as an alternative means of funding, Massive infrastructure spending and large-scale project financing gaining momentum in the GCC. Thus at a time of credit crisis and credit crunch in the international markets, reliance on Sukuk as an alternative means of funding is fast gaining ground.
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