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KembaraXtra – Islamic Finance: Ṣukūk as Instruments of Varying Tenures
Meaning of Tenure in Ṣukūk
The tenure of Ṣukūk refers to the length of time for which the investment remains in force before maturity (if any). One of the key strengths of Ṣukūk is their flexibility in maturity structure, allowing them to be issued as:
- Short-term
- Medium-term
- Long-term
- Perpetual (no maturity) instruments
This flexibility enables Ṣukūk to meet diverse financing and investment needs in the Islamic capital market.
Medium- and Long-Term Ṣukūk (Most Common)
- In most jurisdictions, Ṣukūk are commonly structured with medium- to long-term maturities.
- These tenures are well suited for:
- Infrastructure projects,
- Asset acquisition,
- Corporate expansion,
- Government development spending.
Why this works well:
- Such projects require large capital outlays upfront.
- Cash flows are generated gradually over time.
- Long tenures allow returns to be aligned with project lifecycles.
Example:
A 10- or 15-year Ṣukūk issued to finance a power plant or highway.
Perpetual Ṣukūk
- Perpetual Ṣukūk have no fixed maturity date.
- Investors receive periodic returns, but the principal is not contractually repayable on a specific date.
Key milestone:
Perpetual Ṣukūk first gained prominence in 2012, when Abu Dhabi Islamic Bank issued a landmark Basel III-compliant perpetual Ṣukūk.
Significance:
- This innovation moved Ṣukūk closer to equity instruments rather than fixed-income securities.
- Perpetual Ṣukūk:
- Absorb losses,
- Strengthen capital adequacy,
- Are often classified as Additional Tier 1 capital.
Short-Term Ṣukūk and Liquidity Management
To support Islamic liquidity management, short-term Ṣukūk have also been developed.
Key features:
- Short maturities,
- Temporary transfer of risk and return,
- Designed for brief investment periods.
Why they are important:
- Islamic banks and other institutions offering Islamic financial services (IIFS) often experience:
- Excess liquidity at certain times, and
- Short-term funding shortages at others.
- Short-term Ṣukūk provide a Sharīʿah-compliant solution for both situations.
Example:
An Islamic bank invests surplus funds in a 3-month or 6-month sovereign Ṣukūk.
Addressing Secondary Market Illiquidity
- In practice, many investors adopt a “buy-and-hold” strategy with Ṣukūk.
- This leads to:
- Inactive secondary markets, and
- Limited tradability of outstanding Ṣukūk.
Why this is a problem:
- Illiquid markets make it harder for IIFS to:
- Adjust liquidity positions,
- Sell assets quickly when funds are needed.
Solution:
The structuring of shorter-term Ṣukūk helps improve liquidity management by:
- Providing predictable maturity exits,
- Reducing reliance on secondary market trading.
Simple Exam-Friendly Summary
- Ṣukūk can be issued as short-, medium-, long-term, or perpetual instruments.
- Medium- and long-term Ṣukūk dominate due to infrastructure and project financing needs.
- Perpetual Ṣukūk strengthen capital and resemble equity.
- Short-term Ṣukūk are vital for Islamic liquidity management.
- Varying tenures enhance the flexibility and resilience of the Islamic financial system.
Key Takeaway
The ability to structure Ṣukūk across different maturities, including perpetual forms, allows Islamic finance to support long-term development, capital strengthening, and short-term liquidity needs, making Ṣukūk one of the most versatile instruments in the Islamic capital market.
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