Sukuk investment – international perspective

Publication date: March 03, 2023

Sukuk is a financial bond that complies with Islamic religious law commonly known as Sharia. The traditional Western interest-paying bond structure is prohibited in the Islamic law because the riba, or interest debt, goes against precepts of Islam. Therefore, the Islamic countries and investors need a structure to link the returns and cash flows of debt financing to a specific asset being purchased, effectively distributing the benefits of that asset. In order to do that, in Malaysia, the sukuk was created twenty three years ago and, since then, it has become extremely popular in Islamic finance.

Sukuk represents aggregate and undivided shares of ownership in a tangible asset as it relates to a specific project or a specific investment activity. An investor in sukuk, therefore, does not own a debt obligation owed by the bond issuer, but instead owns a piece of the asset that’s linked to the investment. This means that sukuk holders, unlike bond holders, receive a portion of the earnings generated by the associated asset. Hence, financing can only be raised for identifiable asset, this means an asset whose commercial value can be measured.