Financing Products

Sukuk (Islamic Bonds)

The Arabic word sukuk is the plural of the word sakk which means “financial document allowing the holder to benefit from the amount of money indicated on it.

The Bahrain Monetary Agency has defined Sukuk as “representative of a proportionately beneficial property relationship, for a specified period of time, with risks and returns associated with the cash flows generated by the assets owned by the Sukuk owners. The difference between Sukuk and bank bonds is that Sukuk are asset-based.

The sukuk contract is the equivalent of a bond in conventional finance except that the sukuk are not remunerated by fixed interest but by a profit attached to the return on the underlying asset. The underlying products of sukuk can be represented by contracts like ijara, mousharaka or mudaraba.

The Islamic bond class (the sukuk) contains three main compartments: sovereign sukuk, corporate and bank sukuk, and sukuk from Islamic securitization transactions. Qatar, Malaysia and Bahrain were the first countries issuing sovereign sukuk in 2001.

The Islamic bond market grew rapidly between 2001 and 2007 from $1.2 billion to $35 billion, with an increase of predominance of the global market on the local market. But in 2008, this market experienced a decline due mainly to the subprime crisis, which caused liquidity reduction in the sukuk market.

The Sukuks are also used by many countries to finance themselves through Treasury bills and debt bonds .Islamic companies and financial institutions use it to finance their projects without resorting to the forbidden interest based alternatives.

The AAOIFI has defined at least 14 modalities for structuring “Sukuk”, but in practice the most commonly used are “Sukuk al Ijara”, “Sukuk al Wakala/Mudharaba”, “Sukuk al Musharaka” and “Sukuk al Istisna”

At present, major projects are financed by the issuance of Sukuk which are financial products that allow the transformation of the main financing into tradable securities in the stock exchanges through securitization. These securities could be subscribed by major investors and financial institutions.

Sukuk are a means of financing but above all a means of mobilizing savings. They allow to pay an investment by avoiding the use of interest (Riba). Thus, the investor owns a share of ownership in an underlying asset. In exchange, this one gives him an income. To do this, the issuing company must identify the assets destined for sale in order to offer them to Sukuk investors. This operation is carried out with the intervention of a SPV (Special purpose vehicle) company. Investors then perceive the usufruct of these assets according to the proportion of their investment.

In the case of real estate financing where the Sukuk are particularly used, the SPV proceeds to acquire the property and gives it in leasing to the bank or the issuing company. Leasing rents will be the income on which the remuneration of Sukuk holders is based. And the transaction closes either gradually by instalment of the paid-up capital, or at the end of the contract, with the repurchase of the property by the issuer.

The risks of this transaction are shared: Investors bear the credit risk of the issuer, and the risks associated with the assets are borne by the SPV. In the event of a debtor’s non-payment situation, investors are protected by their property title, but they may also benefit from a sale option to the group that has set up the transaction which is parallel with the option to purchase that the company holds under its Leasing.

Thanks to the principle of Sukuk, the technique of securitization in the spirit of Islamic finance is much better mastered since it can only cover securities backed by tangible assets.

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