Sukuk, also known as Islamic bonds, offer a unique investment avenue that adheres to Sharia, the Islamic law.
According to Velexa, this compliance is pivotal as it diverges from traditional bonds by not representing a debt obligation but rather a share in an underlying asset, service, or venture. This structure is crucial as it aligns with the prohibition of interest (riba) under Sharia and ensures that all financial activities are supported by tangible assets and real economic activities.
The global sukuk market, as of the third quarter of 2023, boasted a total value of $823.4bn, marking an annual growth of 9.8%. This increase is largely attributed to heightened activity in Islamic finance hubs such as Malaysia, Saudi Arabia, and Indonesia, with Malaysia accounting for 40% of the market share. Sukuk certificates are sold to fund the purchase of an asset or finance a business venture, linking returns to asset performance rather than interest, which Sharia prohibits.
Sukuk investors earn returns from the economic performance of the underlying asset. For example, real estate-based sukuk might generate income through rentals, while venture-based sukuk could yield returns from business profits. This direct connection to asset performance not only complies with Islamic laws against riba but also promotes investments rooted in economic productivity.
Sukuk typically have a fixed maturity, and at the end of this term, the issuer repurchases the certificates at their original price, concluding the investment. They offer predictable returns and stability, characteristics vital to medium-term financing. Oversight by a dedicated Islamic law board ensures that all issuances comply with Sharia, avoiding industries contrary to Islamic ethics such as alcohol and gambling.
There are several types of sukuk, each designed to meet different financial needs while adhering to Sharia principles:
- Ijara: These are akin to lease agreements where the sukuk issuer rents out an asset and returns are generated from the rental income.
- Mudaraba: Here, capital is provided by the investors, while the management of the venture is handled by the issuer under a profit-sharing model.
- Murabaha: This involves the issuer buying an asset and selling it at a profit margin. It’s commonly used in personal and real estate financing.
- Musharaka: Represents a joint venture where all parties contribute capital and share profits and losses. This structure is ideal for large-scale infrastructure projects.
Looking ahead, the global sukuk market is projected to issue between $160bn and $170bn, slightly down from $179.4bn in 2022. This forecasted decrease is attributed to various factors including geopolitical risks and changing market conditions. Additionally, there’s a growing trend towards sustainability-linked sukuk, aligning Islamic finance more closely with global ESG goals through the issuance of green sukuk.
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