What Is Sukuk And How It Works?
What is Sukuk?
What is Sukuk?
Sukuk is Arabic word which means legal instrument. It was, then, adopted to describe financial certificate; and now in modern Islamic finance, Sukuk means Islamic bonds equivalent to conventional bonds. Sukuk is in compliance with the Islamic economic laws.
When did Sukuk Started?
Sukuk had been used in medieval times in the Islamic societies in trade and business for the transaction of money. It was like a cheque backed with a guarantee of prescribed money or valuable on the certificate.
The concept of modern Sukuk has been derived from the concept of monetization or securitization. The money is procured through the issuance of Sukuk, which is, then, used in conformity with economic laws of Shariah.
How does it work?
Sukuk is an expression of potential benefit from some asset through complete or partial ownership of the investor of that asset. That benefit is supposed to be achieving in a prescribed period of time. The concept of Sukuk underlies the risk, profit and return of the money from a particular asset which belongs to Sukukholder.
The money generated through Sukuk is often designed as Ijarah or leasing transactions of the assets, which are tradable especially for the secondary market. A Sukuk authority like Islamic government, bank or some company issues certificates of Sukuk to interested investors. The raised funds are then used in, for example, property to generate rent, by giving property on lease for a specific period of time, which is correspondent to the time period of the Sukuk bonds. Car Ijarah, Laptop Ijarah, investment in residential projects are main areas of investment of Sukuk.
Sukuk is comparatively a new concept in the modern Islamic finance so it needs to be dealt with good governance. Executive education in Islamic finance should focus on the feasibility of Sukuk and how to use in other areas of Islamic finance keeping in view the Islamic laws of economics.
How is it different to conventional bonds?
Apparently Sukuk is similar to conventional bonds but the main difference is that Sukuk is asset-based, not just the paper derivatives like that of conventional bonds. Conventional bonds create money out of money, of which a set portion of interest is returned to the investor who invests through bonds, while, the purpose and obligations of Sukuk must be clear and transparent; the money generated through Sukuk must not deal in interest based business activities.
How far is it successful?
Since the modern inception of Sukuk in Islamic finance, it is getting momentum but only for some short-term halts due to financial restraints in some markets due to lack of
good governance .The main reason behind the progress of Sukuk is the good governance,
executive education, and liquidity management. Sukuk helps to generate and place short and medium term funds to enhance cash flow in Islamic finance. Here are some facts:
In the year 2003, the State of Bahrain issued Sukuk of 250 million US dollars. The money was used in Ijarah or lease in the national airport.
Dar Arqan, the biggest Saudi based private developer company heavily depends on the Sukuk bonds to run its mega projects
Saudi bankers are in great anticipation of bumper sale of Sukuk in 2012 after the success of the fist issue of Sukuk in January 2012.
The Central Bank of Bahrains monthly issuance of Sukuk has reached to 190%.
It is observed that the Muslim masses prefer to invest through Sukuk to an un-Islamic investment with similar risk.
Potential for Mudarabah and Musharakah bonds
There is potential for the Mudarabah and Musharakah Sukuk but to make them in compliance with Islamic economic injunctions and resolve the underlying issues much debate, homework is needed to get the approval from the Shariah scholars. It would need executive educating to make it a complete success.
by: Anna Williams
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