SUKUK: An Islamic equivalent of a Bond.

The maturity date has to be more than one year after the issuance of the Bond, or else the same can be termed as a Money market instrument.
SUKUK: An Islamic equivalent of a Bond.
Representational Photo

When a corporation feels that there is a project which is promising, as far as its returns are concerned, but face inadequacy of funds to invest in it, they can issue Bonds.

A bond is a promise of its issuer to its buyer that the principal amount borrowed from the buyer will be returned on a specified date, called maturity, along with interest payments (i.e; Coupons), made semi-annually or annually until the maturity. The maturity date has to be more than one year after the issuance of the Bond, or else the same can be termed as a Money market instrument.

I have just exemplified the case of a company above, but Bonds are also issued by Domestic/ Foreign Governments, Federal/State governments, City Municipalities, investment trusts for various projects.

It's quite evident that bonds heavily deal with Interest (Rib'a), no risk-sharing on the part of a bond-holder; projects don't necessarily have to be asset-based & can deal with prohibited items. All these factors make Bonds, the non-sharia'h compliant financial instruments. This is where an Islamic Bond, termed as 'Sukuk' comes in. 'Sakk' means a legal Instruments, Check or a Deed. So, Sukuk is already plural and the word 'Sukuks' is wrong. However, Sukuk is now used both as singular as well as plural in the Islamic finance industry.

The Prime Minister of the United Kingdom, David Cameron, said  on October 19, 2013, at the ninth World Islamic Economic Forum – the first time that the forum has ever been held outside the Islamic world (in London) that: "This government wants Britain to become the first sovereign outside the Islamic world to issue an Islamic bond. So the Treasury is working on the practicalities of issuing a bond-like sukuk worth around £200 million and we very much welcome the involvement of industry in developing this initiative which we hope to launch as early as next year''.

The Sukuk differs from the bond in following ways: Sukuk gives the investor partial ownership in the asset on which the sukuk are based, while as Bonds don't give the investor a share of ownership in the asset, project, business, or joint venture they support. They're a debt obligation from the issuer to the bond holder. The asset on which sukuk are based must be sharia-compliant, where as there is not such obligation in Bonds.

Sukuk holders receive a share of profits from the underlying asset (and accept a share of any loss incurred), whereas the Bond holders receive regularly scheduled (and often fixed rate) interest payments for the life of the bond, and their principal is guaranteed to be returned at the bond's maturity date. Sukuk usually involves a tangible asset. For instance, you can get a partial ownership of a property constructed by the investment company, and you have a right to earn a rent on that portion of the property. Earning your benefit through a rent does not involve interest and is permissible under Sharia'h.

So, the Sukuk is an Islamic equivalent of the Bond.  Sukuk surprised the financial analysts when its issuance rose from US$ 14.9 billion in 2008 to US$23.3 billion in 2009. Please note this was the time of recession when global capital markets faced huge economic downturn. We know that its market is still in infancy, but the Sukuk growth rate is currently 10-15% in global financial markets. According to Global Islamic Finance Report 2014, $1.813 trillion of assets are being managed according to Islamic investment principles. London Capital Group offers multiple products allowing you to trade FX, stock indices and commodities.

Features low spreads, is LSE listed and offers advanced, secure MT4 trading platform and 24hr support. Losses can exceed deposits. The Islamic development bank maintains that The emergence of Sukuk has been one of the most significant developments in Islamic capital markets in recent years. In easy terms, Sukuk instruments act as a bridge. They link their issuers, primarily sovereigns and corporations in the Middle East and Southeast Asia, with a wide pool of investors, many of whom are seeking to diversify their holdings beyond traditional asset classes. In this way, funds raised through Sukuk can be allocated in an efficient and transparent way to infrastructure initiatives and other deserving projects in the 56 member countries of IDB, as well as communities in over 100 non-member countries.

Both domestic and foreign investors buy Sukuk having various structures approved by Shari'ah boards of Islamic scholars. Had the waters of J&K been in our control rather than that of the NHPC, we could have explored possibilities of issuing SUKUK to wealthy investors in the Gulf to build world-class infrastructure, which could have enormously maximized the benefits of our hydro-energy.

(Mehboob Makhdoomi is an MBA from Pennsylvania University (IUP) United States with a Research degree from Cardiff University, United Kingdom. Email )

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