Friday, October 26, 2012



Sukuk literally means “pieces of paper” or “documents that acknowledge something.” In a commercial sense it refers to instruments used in Islamic finance to allow one party to raise capital or funds in the capital market with the issuance of sukuk papers that list the rights and obligations of all parties involved in a transaction. Even though sukuk are sometimes referred to as Islamic bonds, they are not bonds in the conventional sense as holders of the former are not supposed to expect a fixed rate of returns from their purchase of these securities, as is the case with conventional bond holders. In the case of sukuk, what is important is that holders of the certificates must own the underlying assets to justify returns which are not fixed but are tied to actual returns/incomes generated by the assets owned. Hence, in the case of sukuk musharakah, for example, investors are sold portions of assets to be used in business. Returns to holders are in fact income or profit earned from the use of the assets in a manner specified in the sukuk contracts.

The class of assets that has been used for the purpose of issuing sukuk is fast developing, ranging from mere tangible properties to include rights and claims or receivables. However, the latter classifications have been the subject of discussion by Shariah scholars in terms of their status with regard to securitization or sukuk issuance.

The emergence of sukuk in the market and their wide approval by international Islamic investors stems initially from the fact that they are supposed to be asset-backed. The underlying assets are normally in the form of real tangible assets, a portion of which are sold to investors as previously stated. But in the beginning what the investors own are basically proportionate interest or ownership of the capital provided/money price when they purchase the sukuk as a result of which they are given the necessary certificates/sukuk.

Therefore, sukuk are different from Islamic debt securities which have been widely used in Malaysia for quite sometimes even though they have been described as sukuk as well of late. Islamic debt securities consider outstanding debts to be the subject matters of the transactions that lead to the issuance of securities and as such these certificates may be properly known in fact as debt certificates rather than sukuk that are basically investment certificates whose returns are tied up to the real performance of the relevant assets that back up these papers.

The debts in Islamic debt securities (IDS) are normally debts that have originated from the sale and purchase of tangible assets by way of installments or deferred price the process of which ends up with the debtor/purchaser in the BBA/credit sale issuing certificates of indebtedness in favor of the seller the same to be made tradable in the financial or capital market. What happen in the case of Islamic debt securities is that in order for the certificates to be made tradable the concept used is what is known as sale of debt or bai al-dayn as understood in Islamic law whose permissibility has been debated by Muslim jurist since ancient time

On the other hand, in the case of sukuk, the subject matters represented by the certificates are tangible assets that have been purchased with the use of the fund contributed by the investors when they purchase the sukuk. Given that these assets are held in common by all the relevant investors, each of them is considered to have owned a proportionate interest in the asset commensurate with their respective amount of investment the ownership of which will allow him to get the anticipated return if any and at the same time to assume ownership risk as well throughout the duration.

For those who do not approve a sale of debt in the form of certain sum of money owed (the majority), their concern arises from the act of selling the debt to a third party for more or less than its value that will according to them result in riba'. Apart from this, they also insist that other conditions need to be fulfilled first before debts can be sold particularly to third parties. This is done to safeguard the interests of all parties involved and to avoid triggering Shariah restrictions related to riba' and gharar.

However, when the issued securities represent mixed assets comprising real tangible assets and debts, the trading of these securities can be allowed according to some opinions provided that the value or proportion of real tangible assets surpasses that of the debts or at least 51% or more of the combination of the two.

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