When you buy bonds, you are essentially loaning money to the issuer for a fixed period.

You will receive a

predetermined interest rate, which is usually paid annually within that fixed time frame. The value of the
bond is repaid at the end of the period and you get your money back. However, because Shariah law
prohibits the generation of money from money (such as interest or “riba”), financial instruments that involve
the trading and selling of debts, and conventional loan lending (which includes conventional bonds) are not
permissible.

This is where Sukuk comes in to fill in the gap between Islamic financing and the global capital market.
Sukuk (Arabic: ‫ﺻﻛوك‬, plural of ‫ ﺻك‬sakk, "legal instrument, deed, check") is the Arabic name for a financial
certificate but can be seen as an Islamic equivalent of bond.

What is Sukuk?

According to Securities Commission Malaysia (SC), sukuk refers to certificates of equal value which evidence
undivided ownership or investment in the assets using Shariah principles and concepts endorsed by the
Shariah Advisory Council Malaysia (SAC). Accounting and Auditing Organization for Islamic Financial
Institution (AAOIFI) described sukuk as securities of equal denomination representing individual ownership
interests in a portfolio of eligible existing or future assets.

Think of Sukuk as Islamic bonds that are structured in a way to generate returns to investors and similar to
an asset-backed security. They are issued and traded in compliance with the principles of Shariah, which
prohibit “riba” or interest.

A sukuk can be structured to offer a fixed return similar to the interest on a conventional bond. But unlike a
bond holder, a sukuk holder is granted an ownership interest in the assets or business being financed, and
the return is tied to the performance of the underlying assets.

Malaysia’s flexible foreign exchange administration rules allow multilateral development banks, multilateral
financial institutions, sovereigns, quasi-sovereigns and local or foreign multinational corporations to issue
foreign currency denominated Sukuk in Malaysia.

Sukuk issued by Malaysian government is called Government Investment Issue (GII) and it is used to raise
funds from the domestic capital market to finance the Government’s development expenditure. GII is Islamic
securities issued in compliance with Shariah requirements and is an alternative debt instrument for the
Government. GII is issued under the Government Funding Act 1983 to enable the Government of Malaysia
to raise funding in accordance with the Shariah principles. The terms and conditions of the GII are governed
by, and construed in accordance with, the laws of Malaysia.

How does Sukuk work?

When investors buy Sukuk and become Sukuk holders, they receive a certificate from the issuer as evidence
of ownership and are entitled to receive periodic profit payments on the principal amount invested. Upon
maturity, the Sukuk holder will get back the principal amount of investment. As with most Islamic financial
instruments, there are different methods of achieving the same objective, and the above is just one method
of doing it.
For instance, the periodic profit payments may come in the form of profit-sharing or rental from the asset.
Different types of sukuk are based on different structures of Islamic contracts (Murabaha, Ijara, Istisna,
Musharaka, Istithmar, etc.) depending on the project the sukuk is financing. (For more information on sukuk
contract in Malaysia, please visit BIX Malaysia)

Similar to the conventional securities, Sukuk can be rated on a sovereign and corporate basis. The rating
analyst or the rating agency will mainly focus on the credit rating of the instrument and any expected default
or losses, the agency will give high priority to the legal, the structure and the underlying assets of the Sukuk.
It should be noted that, the rating agency will take the Sukuk assets in account only if the assets are in place,
otherwise, the rating will be based on the borrower portfolio.

Differences between Sukuk and Bonds

Sukuk Bonds

Ownership Partial ownership of an asset. Debt obligation.

The assets that back sukuk should
Compliance
be compliant with Shariah.
The face value of a sukuk is priced
Pricing according to the value of the assets
backing them.
 Sukuk holder receives a share of
profits from the underlying asset
Rewards and risks
 Sukuk holder accepts a share of
any loss incurred
Sukuk holders are affected by costs
related to the underlying asset.
Effects of costs
Higher costs may translate to lower
investor profits and vice versa.
Sale of ownership in the assets
Sales
backing them.
Compliance with laws of
country/locality they are issued in.
Bond pricing is based on credit
rating, i.e. the issuer's credit
worthiness.
 Returns from bonds correspond
to fixed interest (making them
riba)
 Their principal is guaranteed to
be returned at the bond’s maturity
date
Bond holders generally aren’t
affected by costs related to the
asset, project, business, or joint
venture they support. The
performance of the underlying asset
doesn’t affect investor rewards.
Sale of debt.

Although some may argue that the differences between sukuk and bonds are merely technicalities, these
differences matter to Muslims. In fact, the practice of profiting from money alone, at the expense of
productivity and real people has been one of the drivers for many of the economic problems that have plagued
the world in the last decade. Interest and artificial inflation of prices based on debt rather than on real value
is the main reason why bubbles form, burst, and then lead to recessions and depressions.
Sukuk, unlike bonds, are priced according to the real market value of the assets that are backing the sukuk
certificate. Bond pricing is based on the credit rating of the issuer. This is necessary in the case of bonds
because when you sell a bond on the secondary market, you are actually selling the debt in the underlying
loan relationship. The sale of a sukuk on the secondary market is simply the sale of ownership in the asset.

Evolution of Malaysia’s Sukuk Market

Since the year 1990, where the first corporate sukuk, worth RM125 million, were issued in Malaysia by Shell
MDS, the Sukuk market in Malaysia continues to thrive while supported by Malaysia’s conducive issuance
environment, facilitative policies for investment activities and comprehensive Islamic financial infrastructure.
Malaysia maintained its lead by country with a market share of 28.8% in the first half of 2017. Malaysia
recorded RM 138.7 billion (+20.6% y-o-y) of Sukuk issuance as of end-October 2017. The growth was led by
increased issuance by quasi-government (+32.2% or RM 38.2 billion), government (+17.7% or RM 46.5
billion) and corporate (+17.7% or RM 54.0 billion) sectors.

Source: MIFC

Malaysia, being the largest issuer of sukuk globally, is recognised as the most developed Islamic financial
market in the world as measured by Thompson Reuters’ Islamic Finance Development Indicator. Malaysia
has a deep domestic market that supports local-currency sukuk issuances. Moody’s Investors Service
expects sukuk issuance by Islamic financial institutions in Malaysia to grow 10-13% in 2018 and Malaysia
will remain a key issuer in south-east Asia. Moody’s also expected Malaysia to continue dominate global
sukuk issuance volumes both in the long- and short-term market.
For more information on Malaysia’s sukuk issuance, this can be found using BIX SEARCH tools in BIX
Malaysia using 2 easy steps below:
1. Click the BIX SEARCH function on the front page

2. Filter the function to SUKUK

Contact us at feedback@bixmalaysia.com for any further question