Islamic Finance - Sukuk

Islamic Finance

Sukuk

Mustafa Abuelrish

Islamic (“Alternative”) Finance offers a variety of substitutes for Conventional financial products that we have become accustomed to. Whether it’s a purchase of a home or vehicle, financing of higher education or a business, or the unexpected need for funds in the form of a personal loan; Alternative finance can offer tailored fit products for all consumer needs in a mutually beneficial way for both the consumer and the counterparty offering the financial product.

One such product is Sukuk, which can be described as sharia-compliant certificates that represent an undivided ownership interest in an underlying tangible asset proportionate to the value of the holder’s investment. The certificates entitle the holders to receive a pro rata share of the cash flows or the revenues generated by and from the underlying tangible asset. Sukuk are often compared to bonds, but there are two fundamental differences between a bond and a Suk.

The first is that a Suk is not a debt obligation. Rather, each Suk represents an ownership interest in a particular pool of assets. The second fundamental difference, in compliance with Sharia, sukuk holders are not entitled to receive interest. Rather, they receive a portion of the revenues generated by the asset they’re invested in. If no revenues are generated, the sukuk holders are not entitled to any payments.

According to Thomson Reuters Practical Law, there are 14 sukuk structures that are accepted by the Accounting and Auditing Organization for Islamic Financial Institutions. While these structures may vary in their mechanics, many of them are structured as follows:

· The entity seeking capital (originator) establishes a special purpose vehicle (SPV).

· The SPV issues certificates to investors in exchange for cash.

· The SPV purchases assets from the originator using the proceeds of the sukuk issuance that it holds in trust for the investors.

· The assets generate revenues (whether through a lease transaction (ijara) or another Sharia-compliant financing technique) that are used to return a profit to the investors in accordance with their ownership interests.