Defination

Originates from the Arabic word sak. The word sak means “cheque”
or “check”.

“Certificates that represent the holder’s proportionate ownership in an undivided

part of the underlying asset, where the holder assumes all rights and obligations to such asset.” (Source:
IFSB)

Why Necessary?

 Prohibition of investment in short-term debt instruments

 Prohibition of financial transactions in conventional interbank money markets

 Idle surplus funds of Islamic banks

 Lack of short and medium term investment avenues for surplus current assets

Features

An undivided proportionate ownership interest in an asset

 Islamically acceptable income streams are established and translated into tradable securities

 Trust Notes or Certificates similar to Equipment Trust Certificates (ETCs) and Unit Trusts

 Issuer creates a trust over the leased Assets Trustee issues Sukuk to the Primary Subscribers (the
beneficiaries under the trust) in the Primary Market

 Pro-rata undivided beneficial ownership of leased Assets

 Entitlement to income streams from Leased Assets / Portfolio

 Primary Subscribers can resell Sukuk in Secondary Market

 Secondary Buyer will be the new pro-rata beneficial owner of the Leased Assets held in trust

Differences between Sukuk and Conventional Bonds

 Ownership structure

 Compliance mechanism

 Pricing mechanism

 Rewards and risks

 Sales – assets vs. debt

 Principal – maturity value

 Issuance - Underwriting vs. SPV

Top 10 Global Ṣukūk Outstanding Jurisdictions* (2018)
Key Challenges for Sukuk

 Low level of public awareness/ understanding of Islamic finance products and services

 Scarcity of Shari’ah-compliant instruments" and a lack of understanding of " monetary

transmission mechanism"]

 "Complex financial products and corporate structures" in some countries/jurisdictions because

"regulatory and supervisory frameworks" do not "address the unique risks of the industry".

 "Underdeveloped" safety nets and resolution frameworks. In many places these include
complete Islamic deposit insurance systems where premiums are invested in Shari’ah-compliant
assets,

 Shari’ah-compliant “Lender of the Last Resort".

 Regulators who "do not always have the capacity (or willingness) to ensure Shari’ah compliance