KembaraXtra – Islamic Finance – Sukuk: Role of Ṣukūk in Broadening Investors’ Choice

Introduction

Ṣukūk play an important role in expanding the range of investment options available to investors, particularly those seeking Sharīʿah-compliant, medium- to long-term instruments. By offering bond-like risk–return characteristics without reliance on interest, Ṣukūk bridge a critical gap between bank deposits, equities, and conventional fixed-income securities.


1. Access to Long-Term Investment Instruments

Ṣukūk are well suited for investors that require longer maturity profiles, such as:

• Governments,
• Takāful operators,
• Pension funds,
• Mutual and investment funds.

Market practice shows:

• 5-year tenures have traditionally been a “sweet spot” in the Middle East and Asia,
• 10-year tenures are commonly preferred for USD benchmark Ṣukūk issued under Rule 144A / Reg S formats,
• Even longer tenures, including perpetual Ṣukūk, are possible depending on market conditions.

This flexibility allows investors to better match assets with long-term liabilities.


2. Alternative to Bank Deposits and Equities

Before the development of Ṣukūk markets, many investors—especially Sharīʿah-conscious ones—relied heavily on:

• Bank deposits (low return),
• Equity investments (higher risk and volatility).

Ṣukūk provide:

• A non-equity risk profile,
• More stable and predictable cash flows,
• Exposure to capital market instruments without equity-style volatility.

This significantly broadens portfolio choices for conservative and institutional investors.


3. Faith-Based Compliance with Bond-Like Features

Because Ṣukūk:

• Are not based on interest (ribā),
• Are structured using Sharīʿah-compliant contracts,

they allow investors to:

• Preserve faith-based investment principles,
• While still achieving bond-type risk–reward outcomes such as periodic distributions and capital repayment (subject to structure).

This makes Ṣukūk especially attractive to investors who were previously excluded from fixed-income markets.


4. Wider Choice of Maturities and Portfolio Construction

Ṣukūk offer investors:

• Short-, medium-, long-term and perpetual options,
• Flexibility in building diversified portfolios across different maturities.

Investors can select Ṣukūk that best suit:

• Liquidity needs,
• Risk appetite,
• Investment horizon.

5. Asset Exposure and Ownership-Based Investment

By investing in Ṣukūk, investors can gain exposure to:

• Oil and gas assets,
• Infrastructure projects,
• Real estate developments,
• Agricultural and industrial projects.

In asset-backed Ṣukūk:

• Investors have recourse to underlying assets in the event of default,
• They face asset risk rather than pure credit risk,
• Ownership rights strengthen their legal and economic position compared to unsecured creditors.

This enhances investor protection and transparency.


6. Diverse Motivations for Investing in Ṣukūk

A survey by Thomson Reuters (2015) highlights differing investor motivations:

• Conventional and Sharīʿah-window investors:
  • Primarily attracted by competitive yields,
  • Influenced by favourable pricing and strong credit ratings.
• Sharīʿah-compliant institutional investors:
  • Value portfolio diversification most,
  • Followed by attractive yields.

This demonstrates that Ṣukūk appeal to multiple investor segments for different reasons, reinforcing their role in broadening choice.


Simple Exam-Friendly Summary

• Ṣukūk offer long-term investment options suitable for institutional investors.
• They provide alternatives to deposits and equities.
• Ṣukūk preserve Sharīʿah compliance while offering bond-like returns.
• Investors gain access to asset-based and asset-backed exposure.
• Diverse maturities and structures enhance portfolio flexibility.
• Investors are attracted by yield, diversification, and credit quality.

Key Takeaway

Ṣukūk significantly broaden investors’ choices by offering Sharīʿah-compliant, asset-linked, and flexible capital market instruments. They enable investors to diversify portfolios, manage risk more effectively, and access long-term investments that combine ethical compliance with competitive financial returns.

​KembaraXtra – Islamic Finance – Sukuk: Rescheduling and Restructuring of Ṣukūk
​Why Rescheduling and Restructuring Are Needed
Like other capital market instruments, Ṣukūk are exposed to default risk. Default may arise when an issuer (originator/obligor):

• Faces cash flow problems, or
• Experiences financial distress that affects its ability to make periodic distributions or repay principal on time.

To avoid liquidation and allow the issuer to restore liquidity and continue operations, two main remedial approaches are used:

1. Rescheduling, and
2. Restructuring.

Both must comply with Sharīʿah principles, which impose important limitations not found in conventional finance.

1. Rescheduling of ṢukūkWhat Is Rescheduling?
Rescheduling refers to modifying the existing Ṣukūk terms—usually through a supplemental agreement—without creating a new facility.
The goal is to ease short-term payment pressure on the issuer.

How Rescheduling WorksRescheduling typically involves:

• Extending the tenure of the Ṣukūk, and
• Reducing the instalment or periodic payment amount, which:
  • Increases the number of payment periods,
  • Improves the issuer’s cash flow position.

Sharīʿah Rule in Sale-Based ṢukūkFor Ṣukūk structured on sale-based contracts (e.g. murābaḥah, BBA):

• The rescheduled amount must not exceed the original sale price.
• No additional charges may be imposed beyond what was originally agreed.

This is critical because:

• Increasing the sale price due to time extension would resemble riba (interest),
• Sharīʿah prohibits charging extra purely because of delayed payment.

Simple Example (Rescheduling)

• Original Ṣukūk sale price: RM 100 million
• Issuer faces cash flow issues
• Parties agree to:
  • Extend maturity by 3 years,
  • Lower periodic instalments,
• Total amount payable remains RM 100 million, not more.

👉 This is permissible rescheduling under Sharīʿah.

Key Purpose of Rescheduling

• Temporary relief for the issuer,
• Preservation of the original Sharīʿah contract,
• Avoidance of default escalation.

2. Restructuring of ṢukūkWhat Is Restructuring?Restructuring is a more comprehensive solution than rescheduling. It usually occurs when:

• Rescheduling is insufficient, or
• The issuer’s financial condition has deteriorated significantly.

Restructuring may also take place for strategic reasons, such as:

• Mergers,
• Acquisitions,
• Corporate reorganisation.

How Restructuring WorksIn principle, restructuring involves:

• Redemption or termination of the existing Ṣukūk, and
• Entering into new Ṣukūk agreements.

A new restructured amount is created, which may include:

• Outstanding principal,
• Accrued but unpaid profit,
• Contractually permissible penalties or charges (subject to Sharīʿah rules).

As a result:

• The restructured amount may exceed the original sale price.

Sharīʿah Perspective on Restructuring

• The increase in the restructured amount is not treated as riba, because:
  • The old contract is terminated,
  • A new Sharīʿah-compliant contract is entered into,
  • The restructuring reflects a fresh commercial arrangement, not a time-based increase on the same debt.

Simple Example (Restructuring)

• Original Ṣukūk sale price: RM 100 million
• Arrears and unpaid profit: RM 10 million
• Old Ṣukūk is redeemed
• New Ṣukūk issued for RM 110 million

👉 This is permissible only if structured through a new Sharīʿah-compliant contract.

Practical Reality

• There have been several real cases of Ṣukūk default globally.
• Many of these cases required full restructuring, not just rescheduling.
• These experiences have contributed to:
  • Improved documentation,
  • Better risk assessment,
  • Stronger Sharīʿah governance in modern Ṣukūk structures.

Rescheduling vs Restructuring (Conceptual Difference)

• Rescheduling
  • Adjusts payment timing,
  • Does not increase total payable amount,
  • Keeps the original contract alive.
• Restructuring
  • Replaces the old facility,
  • Creates a new contractual relationship,
  • May involve a higher restructured amount.

Important ClarificationWhile innovative market segments such as diaspora Ṣukūk have not yet been developed, experiences from:

• Ṣukūk defaults,
• Liquidity stress events,
  highlight the importance of having clear Sharīʿah-compliant mechanisms for rescheduling and restructuring in the Islamic capital market.

Simple Exam-Friendly Summary

• Ṣukūk may be rescheduled or restructured due to default or financial distress.
• Rescheduling extends tenure without increasing the sale price.
• Restructuring replaces the old Ṣukūk with a new one and may increase the amount.
• Both processes must strictly comply with Sharīʿah rules.
• These mechanisms help issuers recover while protecting investor interests.

Key Takeaway
Rescheduling and restructuring are essential safety valves in the Ṣukūk market. When applied correctly and in line with Sharīʿah principles, they allow financially distressed issuers to recover, preserve value for investors, and maintain confidence in Islamic capital markets.

​KembaraXtra – Islamic Finance – Sukuk: What Does “Ṣukūk Oversubscribed” Mean?

​Simple DefinitionA Ṣukūk is said to be oversubscribed when investor demand exceeds the amount of Ṣukūk offered by the issuer.
In other words:
More investors want to buy the Ṣukūk than the issuer planned to sell.

How Oversubscription Happens

• The issuer announces a Ṣukūk issuance size (e.g. USD 500 million).
• Investors submit orders to purchase the Ṣukūk.
• If total orders exceed USD 500 million, the Ṣukūk is oversubscribed.

Simple Example

• Issuer offers: USD 1 billion Ṣukūk
• Investor demand: USD 2.5 billion
• Result:
  • The Ṣukūk is 2.5 times oversubscribed

👉 Investors may only receive a partial allocation of what they requested.

Why Ṣukūk Become Oversubscribed
Oversubscription usually indicates:

• Strong investor confidence in the issuer,
• Attractive return or pricing,
• High credit quality (e.g. sovereign or government-backed),
• Limited supply of Sharīʿah-compliant investment instruments,
• Favorable market conditions.

What Oversubscription Signals to the Market

• The Ṣukūk is well received,
• The issuer may:
  • Tighten pricing,
  • Increase issuance size,
  • Gain stronger market reputation.
• Investors view the Ṣukūk as:
  • Low-risk,
  • High-quality,
  • Desirable.

Is Oversubscription Good or Bad?

• Good for issuers:
  • Shows strong demand,
  • May reduce funding cost.
• Mixed for investors:
  • Positive signal of quality,
  • But may result in smaller allocations.

Simple Exam-Friendly Definition
A Ṣukūk is oversubscribed when investor demand exceeds the total amount of Ṣukūk offered for issuance.

Key Takeaway
Oversubscription reflects strong market appetite and confidence in a Ṣukūk issuance, highlighting the growing attractiveness of Islamic capital market instruments.

KembaraXtra – Islamic Finance – Sukuk: Ṣukūk Issued in Various Currencies


Overview


Ṣukūk can be issued in different currencies, depending on the issuer’s funding strategy and the target investor base. Issuing Ṣukūk in multiple currencies allows issuers to diversify funding sources, access new markets, and match financing needs with currency exposure.


US Dollar as the Traditional Currency
• The US Dollar (USD) has historically been the dominant currency for international Ṣukūk.
• Reasons include:
• High global liquidity,
• Wide international investor acceptance,
• Benchmark status in global capital markets.


Implication:
USD Ṣukūk are attractive to international investors seeking stable, widely traded instruments.


Expansion into Other Currencies


To broaden investor reach, issuers have increasingly issued Ṣukūk in non-USD currencies, especially in:
• Malaysian Ringgit (MYR), and
• Chinese Yuan (RMB).


This strategy helps:
• Attract regional investors,
• Reduce reliance on USD funding,
• Tap into deep domestic liquidity pools.



Examples of Yuan-Denominated Ṣukūk
• Khazanah Nasional Berhad
• Issued a 500 million yuan Ṣukūk in 2011,
• Marked one of the earliest RMB Ṣukūk issuances.
• Axiata Group Berhad
• Issued a two-year, 1 billion yuan Ṣukūk in September 2013,
• Demonstrated corporate appetite for non-USD Islamic financing.


Significance:
These issuances helped connect Islamic finance with China’s capital markets.



Ringgit-Denominated Ṣukūk by Gulf Issuers


Malaysia’s Islamic capital market is one of the most liquid globally, attracting foreign issuers—particularly from the Gulf region—to issue ringgit-denominated Ṣukūk.


Notable Examples
• Mumtalakat Holding Company
• Issued a 20-year RM 3 billion Murābaḥah Ṣukūk programme (October 2012).
• Abu Dhabi National Energy Company
• Issued a 20-year RM 3.5 billion Murābaḥah Ṣukūk programme (March 2012).
• Gulf Investment Corporation
• Issued a 20-year RM 3.5 billion Ṣukūk programme (March 2011).


Why Malaysia?
• Strong regulatory framework,
• Large institutional investor base,
• Well-developed Sharīʿah governance


Domestic Currency Ṣukūk Issuances


In addition to international issuances, Ṣukūk are frequently issued:
• By domestic issuers,
• In the local currency,
• Targeting resident investors.


Key Characteristics
• Governed by domestic regulations and tax rules,
• Used to:
• Tap local market liquidity,
• Support domestic financial market development,
• Reduce foreign exchange risk.


Example:
A government issues local-currency Ṣukūk to finance infrastructure using domestic savings.



Why Issuing Ṣukūk in Multiple Currencies Matters
• For issuers:
• Diversifies funding sources,
• Matches revenue and financing currencies,
• Lowers dependency on a single market.
• For investors:
• Provides currency diversification,
• Offers access to foreign Islamic investment opportunities.



Simple Exam-Friendly Summary
• USD has traditionally dominated international Ṣukūk issuances.
• Issuers increasingly use MYR and RMB to expand investor reach.
• Malaysian markets attract many foreign issuers.
• Domestic-currency Ṣukūk tap local liquidity and reduce FX risk.
• Multi-currency Ṣukūk enhance the global integration of Islamic finance.



Key Takeaway


Issuing Ṣukūk in various currencies enables Islamic capital markets to become more inclusive, diversified, and globally connected, while allowing issuers and investors to manage currency risk and access deeper pools of liquidity.

​KembaraXtra – Islamic Finance – Sukuk: Ṣukūk Targeting Various Market Segments

Overview
​The Ṣukūk market has expanded beyond its traditional base of Islamic banks and institutional investors. A notable recent trend is the deliberate targeting of new and specialised investor segments, especially those aligned with ethical, sustainable, and socially responsible values. This development reflects the growing alignment between Islamic finance principles and global responsible investment practices.

1. Sustainable and Responsible Investment (SRI) ṢukūkWhat Are SRI Ṣukūk?SRI Ṣukūk are Islamic securities issued to finance projects that meet environmental, social, and governance (ESG) objectives. They sit at the intersection of:

• Islamic finance, and
• The Sustainable and Responsible Investment (SRI) market.

Their primary aim is to mobilise capital for initiatives that deliver positive social and environmental outcomes while remaining fully Sharīʿah-compliant.
Link with the Global Green Bond MarketIn conventional finance, comparable instruments include:

• Green bonds,
• Climate bonds, and
• Social impact bonds.

These instruments typically finance:

• Renewable energy,
• Energy efficiency,
• Low-carbon technologies,
• Climate change mitigation and adaptation.

The green bond market has grown rapidly, rising from USD 13 billion in 2013 to USD 37 billion in 2014, and is expected to continue expanding as ethical investing becomes more mainstream.

2. Green / SRI Ṣukūk InitiativesTo capitalise on this opportunity, collaborative efforts have been established to promote green and SRI Ṣukūk. One such initiative is the Green Sukuk Working Party (GSWP), whose objective is to:

• Encourage the issuance of green and SRI Ṣukūk, and
• Channel investments into renewable energy and environmentally friendly assets.

Several jurisdictions, particularly in the Gulf region, have positioned themselves as potential hubs for green Ṣukūk issuance, including the United Arab Emirates and Dubai.

3. First SRI Ṣukūk in Islamic Finance: IFFImThe first SRI Ṣukūk in Islamic finance was issued by the International Finance Facility for Immunisation (IFFIm).
Key Details

• Issued in December 2014,
• Amount: USD 500 million,
• Tenure: 3 years (matured in December 2017),
• Purpose: to fund global health and immunisation programmes implemented by Gavi in the world’s poorest countries.

Significance

• The Ṣukūk was oversubscribed, reflecting strong investor demand,
• It demonstrated the viability of SRI Ṣukūk as a distinct asset class,
• It reinforced the role of Islamic finance in supporting global social development.

4. Malaysia’s Leadership in SRI ṢukūkRegulatory FrameworkMalaysia has played a leading role in advancing the SRI Ṣukūk market. In August 2014, a dedicated SRI Ṣukūk framework was introduced to facilitate financing for sustainable and socially impactful initiatives.
Khazanah’s SRI Ṣukūk

• First issued in June 2015 by Khazanah Nasional Berhad,
• Issued through a special-purpose vehicle, Ihsan Sukuk Berhad,
• Programme size: RM 1 billion,
• First tranche: RM 100 million.

Use of proceeds:
Funds were channelled to support financial and social inclusion programmes run by Yayasan Amir, a Malaysian not-for-profit foundation.
Impact:

• Strengthened Malaysia’s green and social finance ecosystem,
• Demonstrated how Ṣukūk can finance measurable social outcomes.

5. Diaspora Bonds and the Future Potential for Diaspora ṢukūkDiaspora Bonds in Conventional FinanceDiaspora bonds are issued by governments to their citizens living abroad, relying on:

• Patriotism,
• Emotional attachment,
• Long-term ties to the home country.

Countries such as India and Ethiopia have used diaspora bonds successfully, particularly during periods when access to international capital markets was constrained. Other countries, including Nigeria, Kenya, and the Philippines, are exploring similar instruments.

Prospects for Diaspora Ṣukūk

• To date, diaspora Ṣukūk have not yet been issued.
• However, Islamic finance structures backed by foreign remittance flows have been used in some jurisdictions, such as Pakistan.
• This suggests that diaspora Ṣukūk could emerge as a future market segment within Islamic capital markets.

Simple Exam-Friendly Summary

• Ṣukūk markets are expanding into new investor segments.
• SRI Ṣukūk integrate Islamic finance with ESG and ethical investing.
• The first SRI Ṣukūk was issued in 2014 and was oversubscribed.
• Malaysia has been a pioneer in SRI Ṣukūk development.
• Diaspora bonds exist in conventional finance; diaspora Ṣukūk may develop in the future.

Key Takeaway
By targeting sustainable, ethical, and socially conscious investors, Ṣukūk have evolved beyond traditional financing tools into instruments that support environmental protection, social development, and global sustainability, positioning Islamic finance as a meaningful contributor to the future of responsible finance.

KembaraXtra – Islamic Finance – Sukuk: Retail Ṣukūk Issued in Smaller Denominations

What Are Retail Ṣukūk?

Retail Ṣukūk are Ṣukūk specifically structured for individual and household investors, rather than large institutions. They are issued in smaller denominations, making them:

• More affordable, and
• More accessible to the general public.

The key objective is to allow ordinary individuals to participate in Sharīʿah-compliant capital market investments.

Why Retail Ṣukūk Are Important

1. Increased Accessibility and Affordability

• Smaller denominations reduce the entry barrier.
• Individuals do not need large sums to invest.

Example:
Instead of requiring RM 100,000, a retail Ṣukūk may allow investment from RM 1,000.


2. Alternative to Low-Yield Deposits

Retail Ṣukūk provide:

• A Sharīʿah-compliant alternative to savings and fixed deposit accounts,
• Potentially higher returns,
• Regular income distributions.

If structured like fixed-income Ṣukūk:

• Capital repayment at maturity is often expected,
• Making them attractive to conservative investors.

3. Promotion of Financial Inclusion

Retail Ṣukūk:

• Enable wider public participation in national development,
• Attract investors who may not traditionally invest in capital markets,
• Help integrate households into the formal financial system.

4. Funding Diversification for Issuers

For issuers (governments and corporations):

• Retail Ṣukūk diversify funding sources,
• Reduce reliance on institutional or foreign investors,
• Strengthen domestic capital markets.

Country and Market Examples of Retail Ṣukūk

Saudi Arabia – SABIC Retail Ṣukūk

In 2006, Saudi Arabia Basic Industries Corporation (SABIC) issued a retail-oriented Ṣukūk of up to SAR 3 billion.


Key features and challenges:

• Open to Saudi nationals and residents,
• Approved by the Sharīʿah Supervisory Committee of SABB Amanah,
• Initial minimum subscription:
  • SAR 500,000 (each Ṣukūk worth SAR 50,000),


• Retail participation was limited due to:
  • High minimum investment,
  • Low risk–return profile,
  • Limited public understanding of Ṣukūk.

Improvement in later issuances:

• In 2008, minimum subscription reduced to SAR 10,000,
• Each Ṣukūk worth SAR 10,000, making it more retail-friendly.

Indonesia – Sukuk Negara Ritel (Sukri)
The Government of Indonesia began issuing retail government instruments to tap domestic savings.

• Conventional retail bonds: Obligasi Negara Ritel (ORI) (since 2006),
• Retail Ṣukūk: Sukuk Negara Ritel (Sukri) (first issued in February 2009).

Objectives:

• Finance budget deficits,
• Reduce reliance on foreign borrowing,
• Encourage public participation.

Distribution strategy:

• Sold directly to the public through banks and agents,
• Promoted at universities and less-developed financial regions.

Malaysia – Exchange-Traded Retail Ṣukūk

Malaysia has been a leader in retail Ṣukūk innovation.

• In 2010, the Finance Minister announced plans to support retail debt securities.
• This led to the launch of the Exchange Traded Bonds and Sukuk (ETBS) platform on Bursa Malaysia in 2013.

DanaInfra Nasional Berhad Retail Ṣukūk

• Issued by DanaInfra Sdn bhd
• Part of an ICP/IMTN programme of up to RM 8 billion,
• Purpose: finance the MRT Kajang–Sungai Buloh project.

Retail-friendly features:

• First issuance: RM 300 million,
• Minimum subscription: RM 1,000,
• Subscriptions in multiples of RM 1,000,
• Listed and traded on Bursa Malaysia (8 February 2013).

Impact:

Enabled Malaysians to invest directly in national infrastructure,

• Linked personal savings to economic development.

Other Jurisdictions

• Countries such as Türkiye have also moved towards retail participation.
• Since February 2013, Turkish personal pension funds are allowed to allocate investments into sovereign Ṣukūk.

Simple Exam-Friendly Summary

• Retail Ṣukūk are issued in small denominations for individuals.
• They provide Sharīʿah-compliant, income-generating alternatives to deposits.
• They promote financial inclusion and public participation.
• Issuers benefit from diversified funding sources.
• Countries like Saudi Arabia, Indonesia, Malaysia, and Turkey have actively developed retail Ṣukūk markets.

Key Takeaway

Retail Ṣukūk bridge the gap between Islamic capital markets and ordinary households, allowing individuals to invest safely, ethically, and productively while contributing directly to national and economic development.

KembaraXtra – Islamic Finance – Sukuk: Comparison between Ṣukūk, Bonds and Shares
Introduction

Ṣukūk were initially developed to provide a Sharīʿah-compliant alternative to conventional bonds, especially to meet the large-scale financing needs of governments and corporations. As a result, Ṣukūk share some similarities with bonds in practice, while at the same time retaining important conceptual similarities with shares (equity). However, there are also clear and fundamental differences among Ṣukūk, bonds, and shares in terms of nature, risk, returns, ownership, and Sharīʿah compliance.


Similarities between Ṣukūk and Bonds

Ṣukūk and bonds share several practical and market-related features:

• Capital market instruments
  Both are used to raise funds for major financing needs of:
  • Governments (sovereigns),
  • Corporations,
  • Parastatal bodies,
  • Financial institutions.
• Various tenures
  Both can be structured as:
  • Short-term,
  • Medium-term,
  • Long-term,
  • Even perpetual instruments.
• Regular returns and principal repayment
  Both can be designed to:
  • Provide periodic payments during the life of the instrument, and
  • Repay the principal amount at maturity.
• Secondary market tradability
  In general, both instruments:
  • Can be traded in secondary markets,
  • Are transferable among investors (subject to Sharīʿah rules in the case of Ṣukūk).
• Market infrastructure
  Both can be:
  • Rated by credit rating agencies,
  • Listed on exchanges,
  • Issued in multiple currencies,
  • Offered in domestic and international markets.

Conceptual Similarity between Ṣukūk and Shares
From a theoretical perspective:

• Ṣukūk resemble equity, because they represent:
  • Proportionate ownership in assets, projects, or ventures.
• Shares represent:
  • Ownership in a corporation as a whole,
  • Often accompanied by voting rights.

However, despite this conceptual similarity, Ṣukūk and shares differ significantly in practice.

Key Differences between Bonds, Ṣukūk and Shares

1. Nature of the Instrument

• Bonds
  Represent an IOU or interest-bearing debt obligation of the issuer.
• Ṣukūk
  Represent proportionate ownership in Sharīʿah-compliant:
  • Assets,
  • Usufructs,
  • Services,
  • Commodities,
  • Business ventures,
  • Or a combination of these.
• Shares
  Represent ownership in the corporation as a whole.

2. Issuer

• Bonds
  Issuers are not restricted in their business activities.
• Ṣukūk
  Issuers must be engaged in Sharīʿah-compliant activities only.
• Shares
  Can be issued by any company, although Sharīʿah screening applies for Islamic equity investment.

3. Investors

• Bonds
  Traditionally targeted at non-Islamic investors.
• Ṣukūk
  Open to both Islamic and non-Islamic investors.
• Shares
  Also open to both Islamic and non-Islamic investors.

4. Relationship between Issuer and Investor

• Bonds
  Create a lender–borrower relationship; investors are creditors.
• Ṣukūk
  Relationship depends on the Sharīʿah contract used (sale, lease, partnership, agency, etc.).
• Shares
  Investors become owners (shareholders) with ownership rights in the company.

5. Underlying Assets

• Bonds
  • Unsecured bonds: no assets required.
  • Secured bonds: may be backed by assets (even non-Sharīʿah-compliant).
• Ṣukūk
  Must be backed by Sharīʿah-compliant underlying assets, which may include:
  • Tangible assets,
  • Usufructs,
  • Services,
  • Receivables (subject to jurisdictional rules).
• Shares
  Do not require specific underlying assets.

6. Asset-Related Expenses

• Bonds
  Bondholders do not bear asset-related expenses.
• Ṣukūk
  Ṣukūk holders may bear asset-related expenses, reflecting ownership.
• Shares
  Shareholders do not directly bear specific asset expenses.

7. Status and Ranking

• Bonds
  Bondholders are generally unsecured creditors, unless secured.
• Ṣukūk
  • Asset-backed Ṣukūk: investors have recourse to assets and rank above unsecured creditors.
  • Asset-based Ṣukūk: investors rank pari passu with unsecured creditors.
• Shares
  Shareholders are residual claimants and rank lowest in liquidation.

8. Returns to Investors

• Bonds
  Returns are interest-based coupon payments, representing a percentage of capital.
• Ṣukūk
  Returns are Sharīʿah-compliant, derived from:
  • Profits (sale or partnership),
  • Rentals (lease).
• Shares
  Returns come in the form of dividends, which are not guaranteed.

9. Principal Repayment

• Bonds
  Principal repayment at maturity is guaranteed, regardless of performance.
• Ṣukūk
  • Partnership-based Ṣukūk: no ex-ante guarantee of capital.
  • Sale- and lease-based Ṣukūk: principal is generally repaid.
• Shares
  No principal repayment, as shares are perpetual instruments.

10. Utilisation of Proceeds

• Bonds
  Proceeds can be used for any legal purpose.
• Ṣukūk
  Proceeds must be used for Sharīʿah-compliant activities only.
• Shares
  Equity can be issued to meet any corporate financing needs.

11. Tradability in the Secondary Market

• Bonds
  Trading represents sale of debt.
• Ṣukūk
  Trading represents sale of ownership in assets or projects:
  • Globally (e.g. AAOIFI): trading allowed mainly for asset-based Ṣukūk.
  • Malaysia: trading of debt-based Ṣukūk is permitted.
• Shares
  Trading represents sale of ownership in the company.

12. Pricing

• Bonds
  Pricing is based on:
  • Credit rating,
  • Terms and conditions,
  • Spread over a reference interest rate.
• Ṣukūk
  Pricing depends on:
  • Structure of the Ṣukūk,
  • Asset backing (for asset-backed Ṣukūk),
  • Market liquidity and complexity.
• Shares
  Pricing is tied directly to corporate performance and market perception.

Simple Exam-Friendly Summary

• Bonds = debt + interest.
• Ṣukūk = ownership + Sharīʿah-compliant returns.
• Shares = ownership in a company with residual risk.
• Ṣukūk sit between bonds and shares, combining asset ownership with capital market features.

Key Takeaway

Ṣukūk are neither conventional bonds nor ordinary shares. They are a distinct Sharīʿah-compliant capital market instrument that blends ownership, ethical investment, and structured finance—offering a unique balance between risk, return, and compliance within the Islamic financial system.

​KembaraXtra – Islamic Finance – Sukuk: Main Classifications of Ṣukūk

Conceptual Background
​In theory, all Ṣukūk resemble equity instruments because they represent:

• Ownership in assets, a pool of assets, or a business venture, and/or
• A claim on cash flows generated by those assets or activities.

However, in practice, Ṣukūk display different risk–reward characteristics. Some behave more like equity (risk-sharing), while others resemble fixed-income instruments (predictable cash flows).
For this reason, Ṣukūk are commonly classified into different categories, reflecting:

• Their economic behaviour, and
• The Sharīʿah contracts used in their structuring.

Why Classification of Ṣukūk Is ImportantClassifying Ṣukūk helps:

• Investors understand risk exposure and expected returns,
• Issuers choose suitable structures for financing needs,
• Regulators and Sharīʿah boards assess compliance and tradability.

Main Classifications of Ṣukūk
Ṣukūk are generally classified into three broad groups:

1. Ṣukūk Based on the Underlying Sharīʿah Contracts
What this classification meansThis classification focuses on the Islamic legal contract used to structure the Ṣukūk. Since each contract has different Sharīʿah rules, this directly affects:

• Ownership,
• Risk-sharing,
• Income generation,
• Tradability.

Common examples

• Partnership-based Ṣukūk
  • Mushārakah
  • Muḍārabah
    → Equity-like, profit-and-loss sharing
• Lease-based Ṣukūk
  • Ijārah
    → Rental income, asset-backed
• Debt / sale-based Ṣukūk
  • Murābaḥah
  • Salam
  • Istiṣnāʿ
    → Receivable-based, limited tradability
• Agency-based Ṣukūk
  • Wakālah bi al-Istithmār
    → Managed investment portfolios
• Hybrid Ṣukūk
  • Combination of contracts
    → Mix of debt-like and equity-like features

Why this mattersDifferent contracts imply:

• Different Sharīʿah rulings,
• Different risk allocation,
• Different secondary market treatment.

2. Ṣukūk Based on Technical and Commercial Features
What this classification means
​This approach classifies Ṣukūk according to how they function in capital markets, regardless of the contract used.
Key technical and commercial features include

• Tenure
  • Short-term
  • Medium-term
  • Long-term
  • Perpetual
• Payment profile
  • Fixed distributions
  • Variable or profit-based distributions
• Ranking
  • Senior Ṣukūk
  • Subordinated Ṣukūk
• Convertibility
  • Convertible or exchangeable Ṣukūk
• Purpose
  • Project financing
  • Liquidity management
  • Capital adequacy (e.g. Basel III)

Why this mattersThis classification helps investors assess:

• Cash flow predictability,
• Capital protection,
• Regulatory treatment,
• Suitability for portfolios.

3. Ṣukūk Based on the Nature and Types of AssetsWhat this classification meansThis classification focuses on what backs the Ṣukūk.
Main asset-based distinctions

• Asset-backed Ṣukūk
  • True sale of assets
  • Investors have direct recourse to assets
• Asset-based Ṣukūk
  • Beneficial ownership
  • Recourse mainly to the issuer
• Blended-asset Ṣukūk
  • Mix of tangible assets and receivables
  • Common in Wakālah Ṣukūk
• Asset-light Ṣukūk
  • Limited physical assets
  • Greater reliance on rights or services

Why this mattersThe nature of assets affects:

• Tradability,
• Risk exposure,
• Recovery in default,
• Sharīʿah acceptability.

Important Conceptual Reminder

• Not all Ṣukūk merely represent collateral or reference assets.
• Some Ṣukūk represent:
  • Business ownership,
  • Project participation,
  • Investment activities.

Thus, Ṣukūk should not be viewed as a single homogeneous instrument.

Simple Exam-Friendly Summary

• In theory, all Ṣukūk are equity-like due to ownership.
• In practice, they differ in risk–reward profiles.
• Ṣukūk are classified based on:
  1. Underlying Sharīʿah contracts,
  2. Technical and commercial features,
  3. Nature and type of underlying assets.
• These classifications help assess Sharīʿah compliance, risk, and market behaviour.

Key Takeaway
Ṣukūk are a diverse class of Islamic financial instruments. Understanding their main classifications is essential to appreciating how Islamic finance balances Sharīʿah principles, economic functionality, and market practicality.

KembaraXtra – Islamic Finance – Sukuk: What Does “Redemption” Mean?

Redemption does NOT always mean full cash repayment.
Its meaning depends on the situation.

1. Redemption in a Normal (Non-Distressed) ṢukūkWhat it means

• Redemption = payment of the invested amount (principal / face value)
• Happens at maturity.

Simple example

• Investor invests RM 100,000 in Ṣukūk
• At maturity:
  • Issuer pays RM 100,000
• Ṣukūk ends

✅ This is full cash redemption.

2. Redemption in a Restructuring Scenario (Key Distinction)What redemption means here

• Redemption = termination or cancellation of the existing Ṣukūk contract
• NOT necessarily cash repayment

👉 It is a legal and contractual redemption, not a cash one.

Why cash redemption may not happen

• Issuer is in financial distress
• Issuer cannot pay the amount due
• So instead:
  • Old Ṣukūk is redeemed on paper
  • A new Ṣukūk is issued in its place

Simple restructuring example

• Original Ṣukūk:
  • Investment: RM 100 million
• Issuer defaults
• Parties agree to restructure

Step 1: Redemption

• Old Ṣukūk is cancelled / extinguished
• Investors do not receive cash

Step 2: New Ṣukūk issued

• New Ṣukūk value: RM 110 million
  • Includes arrears and unpaid profit
• Investors now hold new certificates

✅ This is redemption by replacement, not repayment.

3. Why This Is Still Called “Redemption”In legal and capital-market terms:

• Redemption can mean:
  • Discharge of an obligation, or
  • Extinguishing a contract

It does not always mean cash settlement.

4. Difference Between Redemption and Repayment (Very Important)Redemption

• Ends the existing Ṣukūk
• Can be:
  • By cash payment, or
  • By replacement with a new instrument

Repayment

• Always means:
  • Cash payment to investors

👉 All repayments are redemptions,
👉 But not all redemptions involve repayment.

5. Exam-Ready One-Line AnswerIn Ṣukūk, redemption usually means repayment of the invested amount at maturity, but in restructuring it may simply mean termination of the existing Ṣukūk and replacement with a new restructured facility without immediate cash payment.

Key Takeaway (Remember This)

• Normal case → Redemption = cash repayment
• Distress case → Redemption = cancel + restructure
• Context determines the meaning

KembaraXtra – Islamic Finance – Sukuk: Why Ṣukūk Liabilities Can Sit on the SPV’s Balance Sheet

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Core Idea

This is possible only when the SPV is truly independent and the asset transfer is real, so the issuer no longer controls the assets or bears the main risks.

Step-by-Step Explanation

1. The SPV Is a Separate Legal Person

An SPV is:

• Incorporated as a separate company or trust,
• With its own legal personality,
• Able to own assets, issue securities, and incur liabilities in its own name.

👉 In law, the SPV is not the issuer.


2. Ṣukūk Are Issued by the SPV, Not the Originator


In most Ṣukūk structures:

• The SPV is the issuer of the Ṣukūk, and
• Investors lend/invest into the SPV, not directly into the originator.

So legally:

• The SPV owes money (periodic distributions and redemption) to Ṣukūk holders,
• The originator does not issue the certificates.

3. True Sale of Assets to the SPV

For off-balance sheet treatment, there must be a true sale:

• The originator sells assets (or usufruct) to the SPV,
• Ownership (legal or economic) is transferred,
• The originator cannot freely reclaim the assets.

Once sold:

• Assets belong to the SPV,
• Risks and rewards pass to the SPV (and ultimately investors).

4. Accounting Follows Control and Risk (Not Labels)

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Under accounting standards (e.g. IFRS):

• If the originator does not control the SPV, and
• Does not bear most of the risks or rewards,

👉 the SPV is not consolidated into the originator’s accounts.

So:

• The SPV records:
  • Ṣukūk liabilities,
  • Underlying assets.


• The originator removes:
  • The asset,
  • The related liability.
  
  

5. What the Balance Sheets Look Like

Originator’s Balance Sheet

• Asset sold → removed
• Ṣukūk liability → not recorded
• Instead: receives cash from asset sale

SPV’s Balance Sheet

• Asset purchased → recorded
• Ṣukūk issued → recorded as liability

👉 This is how the liability “moves” to the SPV.

Simple Numerical Example

Before Ṣukūk

Originator:

• Asset: RM 500 million power plant
• No Ṣukūk

After Asset-Backed Ṣukūk

1. Originator sells power plant to SPV for RM 500 million
2. SPV issues RM 500 million Ṣukūk to investors
3. Investors pay SPV
4. SPV pays originator

Result:

• Originator
  • Asset removed
  • Receives RM 500 million cash
  • No Ṣukūk liability


• SPV
  • Owns power plant
  • Owes RM 500 million to Ṣukūk holders

6. Why This Does NOT Always Happen in Practice




Many Ṣukūk fail to achieve this because:

• No true sale (only beneficial ownership),
• Originator gives purchase undertakings at face value,
• Originator guarantees payments,
• Originator controls the SPV.

In such cases:
👉 Accounting standards require consolidation, and
👉 Ṣukūk stays on the originator’s balance sheet.


7. Key Distinction (Must Remember)


Scenario
Where is the liability?
True asset-backed Ṣukūk
SPV’s balance sheet
Asset-based / guaranteed Ṣukūk
Originator’s balance sheet


Exam-Ready One-Liner

Ṣukūk liabilities appear on the SPV’s balance sheet when the SPV is legally independent and the originator has transferred control and risk of the underlying assets through a true sale, preventing consolidation under accounting standards.


Key Takeaway

The statement is not automatic.
It is possible only when legal separation + real asset transfer + loss of control all exist together.


If you want next, I can:

• Draw a simple flow diagram of balance sheets,
• Compare true sale vs beneficial ownership visually,
• Explain why many Gulf Ṣukūk stay on-balance sheet