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SUKUK

Sukuk (Arabic: صكوك, plural of صك Sakk, "legal instrument, deed") is the Arabic name for a financial certificate but can be seen as an Islamic equivalent of bond. However, fixed income, interest bearing bonds are not permissible in Islam, hence Sukuk are securities that comply with the Islamic law and its investment principles, which prohibits the charging, or paying of interest. Financial assets that comply with the Islamic law can be classified in accordance with their tradability and non-tradability in the secondary markets.

An Islamic financial certificate, similar to a bond in Western finance, that complies with Shariah, Islamic religious law. Because the traditional Western interest paying bond structure is not permissible, the issuer of a Sukuk sells an investor group the certificate, who then rents it back to the issuer for a predetermined rental fee. The issuer also makes a contractual promise to buy back the Sukuk at a future date at par value.

Sukuk must be able to link the returns and cash flows of the financing to the assets purchased, or the returns generated from an asset purchased. This is because trading in debt is prohibited under Shariah. As such, financing must only be raised for identifiable assets.

Sukuk Secondary Market

Sukuk securities tend to be buy and hold and as such little of the securities enter the secondary market (allowing them to be traded). Furthermore it is only public Sukuk which are able to enter this market as they are listed on stock exchanges.

The secondary market whilst developing remains a niche segment with virtually all of the trading done at the institution level. The size of the secondary market remains unknown, though LMC Bahrain state they traded $55.5million of Sukuk in 2007. The European Islamic Investment Bank (EIIB) in an interview published on Sukuk.net stated "Secondary market trading volume has contracted significantly in the first half of 2008 when compared to 2007 where Sukuk with a nominal value of approximately $0.5bn was traded".

Controversy

Sukuk are widely regarded as controversial due to their perceived purpose of evading the restrictions on Riba. Conservative scholars do not believe that this is effective, citing the fact that a Sakk (Islamic bond) effectively requires payment for the time-value of money. This can be regarded as the fundamental test of interest. Sukuk offer investors fixed return on their investments which is also similar in appearance to interest in that the investor's return is not necessarily dependent on the risks of that particular venture. However, banks that issue Sukuk are investing in assets--not currency. The return on such assets takes the form of rent, and is evenly spread over the rental period. The productivity of the asset forms the basis of the fixed income stream and the return on investment. Given that there is an asset underlying the value of the certificate, there is more security for the investors involved, accounting for the additional appeal of Sukuk as a method of financing for investors.

 

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