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KembaraXtra – Islamic Finance: Use of Ṣukūk Proceeds in Sharīʿah-Compliant Activities
Core Principle
A fundamental requirement of Sharīʿah is that funds raised through Ṣukūk must be used only for Sharīʿah-compliant purposes. This requirement applies not only to the structure of the Ṣukūk, but also to how the proceeds are actually utilised after issuance.
In simple terms:
Halal financing must fund halal activities.
Why Use of Proceeds Matters in Ṣukūk
Ṣukūk are asset-based or activity-based instruments. Therefore:
- The underlying assets must be Sharīʿah-compliant, and
- The activities funded by those assets must also be Sharīʿah-compliant.
It is not sufficient for the asset alone to be permissible if it is used for haram activities.
Simple Example to Understand This Rule
- A building is generally a Sharīʿah-compliant asset.
- However:
- If the building is leased to a casino,
- The rental income becomes haram.
👉 Therefore, such a building cannot be used as an underlying asset for Ṣukūk, even though the asset itself is physical and lawful.
How This Differs from Bonds
- Bonds:
- Proceeds may be used for any purpose,
- No Sharīʿah or ethical restriction on utilisation.
- Ṣukūk:
- Proceeds must be strictly Sharīʿah-compliant,
- Both asset eligibility and use of funds are regulated
This is a key distinction between Islamic and conventional capital market instruments.
Sharīʿah Standards on Use of Proceeds
AAOIFI Requirement
According to Acounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) Sharīʿah Standard No. 17 (5/1/8/5):
“The prospectus must state that the investment of the realised funds and the assets into which the funds are converted will be undertaken through Sharīʿah-compliant modes of investment.”
Simple meaning:
- The Ṣukūk prospectus must clearly declare:
- How funds will be invested, and
- That all investments will comply with Sharīʿah.
SC Malaysia Requirement
Similarly, the Securities Commission Malaysia, under its Guidelines on Unlisted Capital Market Products (2015), states:
“For Ṣukūk, the issuer must ensure that the proceeds from the Ṣukūk issuance are utilised for Sharīʿah-compliant purposes only.”
Simple meaning:
- Issuers are legally and Sharīʿah-bound to ensure proper use of funds.
Common Sharīʿah-Compliant Uses of Ṣukūk Proceeds
In practice, Ṣukūk proceeds are widely used by sovereigns, corporates, and IIFS for purposes such as:
- General working capital (halal businesses only),
- Refinancing existing Sharīʿah-compliant obligations,
- Development of infrastructure projects,
- Business expansion,
- Financing public utilities and social development projects.
Examples:
- Building highways or power plants,
- Expanding manufacturing facilities,
- Financing hospitals or schools,
- Developing transportation systems.
What Is Not Allowed
Ṣukūk proceeds cannot be used for:
- Gambling or casinos,
- Alcohol or tobacco production,
- Conventional interest-based financial services,
- Any activity prohibited under Sharīʿah.
Simple Exam-Friendly Summary
- Ṣukūk proceeds must be used only for Sharīʿah-compliant activities.
- Both the asset and its use must be halal.
- This requirement is enforced by:
- AAOIFI standards, and
- SC Malaysia guidelines.
- Bonds do not impose such restrictions.
Key Takeaway
The Sharīʿah requirement on the use of proceeds ensures that Ṣukūk finance real, ethical, and socially beneficial economic activities, reinforcing the core Islamic finance objective of linking finance with lawful and productive use of wealth.
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