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IIslamic Capital Market - Sukuk -Features, Types, and Mechanisms
I. Fundamental Distinction: Sukuks vs. Islamic Bonds
I. Fundamental Distinction: Sukuks vs. Islamic Bonds
- Sukuk:
- Monetary-denominated participation certificates.
- Represent proportionate ownership in underlying assets.
- Subject matter of securitization: Tangible assets, usufruct, or interest in a project.
- Holders share in revenues generated by underlying assets.
- Islamic Bonds:
- Debt certificates or "IOUs."
- Subject matter of securitization: Obligations/indebtedness or receivables.
- Ownership: Sukuk holders possess an undivided beneficial ownership interest in the underlying assets.
- Returns: Returns are not fixed or guaranteed. They are subject to the performance of the underlying asset or project.
- Investment Type: Evidence of investment in an asset or project (typically income-generating).
- Riba Compliance: Structured to avoid Riba (interest).
- Sukuk Mudarabah & Musharakah: Revenue shared is based on the profits generated by the underlying business venture or partnership.
- Sukuk Ijarah: Revenue is generated from lease rental payments made by the lessee to the SPV (Special Purpose Vehicle), then distributed to Sukuk investors.
- Early issuances of Islamic bonds (especially in Malaysia) faced criticism.
- These bonds were primarily based on receivables securitization.
- Trading based on sale of debt concept was contentious as receivables are considered monetary assets.
- Trading of receivables-based securities must be at par value to avoid Riba (unequal exchange of money).
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