What Are Sukuk, and How Do They Work?

Sukuk are normally incorrectly referred to as an Islamic bond. The concept was developed by a majority of the Muslim population. In brief, we can say that Sukuk are financial products that comply with the structure and terms of shariah. The concept is now being used for lending money in Malaysia and some other parts of the world. If you are interested to know more about a Sukuk and how it works, you can go through the following article. It will enable you to understand the concept in a better way.

When you buy a bond, you give a loan to the person and get an interest rate in return for a fixed time. You will receive the interest annually for a fixed timeframe. You will get back the value of the bond once the period gets over. However, Shariah does not support the interest rate. Sukuk come in here to fill the gap and create a suitable option for lenders to make money. Let’s know more about Sukuk.

What Are Sukuk?

Sukuk is a term used by Muslims for lending money. As stated by the Securities Commission Malaysia, the term is referred to as the certificate of the same value that proves the undivided ownership in the assets by using the concept approved by the Shariah Advisory Council and the principles of Shariah.

Also, the Accounting and Auditing Organization for Financial Institution takes Sukuk as the securities for equal participation in ownership interest in a portfolio for existing and future assets. The term is used for Islamic bonds as a way to generate interest for investors. However, these bonds are issued with the principle of shariah and that prohibits interest or riba.

A Sukuk can be made to get a fixed return. The foreign exchange administration in Malaysia allows multilateral financial institutions, multilateral developmental banks, sovereigns, foreign multinational corporations, and quasi-sovereign corporations to issue Sukuk in Malaysia.

Malaysian government issued Sukuk are known as Government Investment Issue. These Sukuk are used to get funds to finance government projects. All the Sukuk are issued following Shariah principles. The terms and conditions are regulated by the laws of Malaysia.

How Does It Work?

Once one becomes a Sukuk holder, the person receives a certificate as evidence of ownership. The certificate entitles the person to receive profit payments on the bond amount for a timeframe. Once the period gets over, the Sukuk holder will receive the invested amount. In addition to the above, one can rate Sukuk on a corporate or sovereign basis just like conventional securities. The rating agency will consider the instrument’s credit rating as well as the losses to conclude. While doing so, the agency will give the highest priority to the legalities and structure of the Sukuk.

You might not find much difference between bonds and Sukuk. The key difference is the technicalities. However, this difference matters a lot to Malaysians. Unlike bonds, Sukuk are decided on the real market value of the assets. The bond pricing is decided depending on the issuer’s credit rating.