By Mohammed Waseem

Islamic Finance also has a bond like conventional financial system has bonds as a medium of investment. The word Sakk refers to a single bond and its plural is Sukuk, which is a famous word in the world of Islamic Finance. Sukuk are Islamic bonds that are structured in a way to generate returns to the investors, without any transaction involving riba (usury).

Islamic Banking Products - SukukBy definition, Sukuk are shares in the ownership of tangible assets with reference to a particular project or an investment activity. Conventional bonds require the investor to pay the bond holder the amount owed, along with interest on a specified date. In case of Sukuk, the element of debt is non-existent, bond holders share the beneficial ownership of the asset or the project that the bonds represent.

Due to this, Sukuk holders are entitled to the revenues generated by the sukuk assets, and sale of sukuk is necessarily the sale of a share in the ownership of the asset. Sukuk are generally issued to raise long term finance for a particular project. They have become very wide spread and have reached an investment of over $1.34 trillion according to Global Islamic Finance Report 2012.

Few years ago, there was a controversy on whether all the Sukuk in the Islamic Financial market were Islamic. Mufti Muhammad Taqi Usmani, president of the Accounting & Auditing Organization For Islamic Financial Institutions (AAOIFI), Bahrain, said in 2008 that over 80% of the Sukuk that were being traded were un-Islamic for the fact that they were being considered for investment in currency, giving a way to the concept of time value of money in the investments, which is invalid in Islamic Finance. In addition, there was another reason; many sukuk were traded with a promise to repurchase on a future date at the face value of the bond.

Such a transaction is similar to the conventional financial product, futures, which is un-Islamic due to the existence of the guaranteed return, regardless of profit or loss. For an investment product to meet Islamic Financial standards, the owners should share the risk and the profit under all circumstances. The AAOIFI has suggested that they will be applying stricter rules for approving Sukuk issuance for companies. These rules include conditions that suggest that sukuk must represent ownership shares in assets or commercial or industrial enterprises that would bring revenues or profits, payment to the sukuk holders should be a share of the net profits generated and the value payable to the sukuk holder on maturity should be the current market value of the asset or project and not the value at the time of investment.

Sukuk can either take the form of Murabahah, Musharakah, Ijarah (Asset), Istithna (Project) or Istithmar (Investment). We will discuss these in our next article on the subject of Sukuk.