Sukuk (or sak – singular of sukuk) has its roots in 8th century AD. Originally, a sak served as a promissory note which embodied financial obligations amongst merchants. Through sukuk, merchants facilitated trade and other commercial activities amongst one another.
According to the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOFI), Sukuk are:
"certificates of equal value representing undivided shares in ownership of tangible assets, usufruct and services or (in the ownership of) the assets of particular projects or special investment activity, however this is true after receipt of value of the Sukuk, the closing of subscription and the employment of funds received for the purpose for which the Sukuk were issued[1] ."
When dealing with Islamic finance, it is crucial to keep in mind that transactions should be related to real productive economic activities. Thus, speculative transactions such as those which are purely paper / monetary transactions are forbidden.
There are five prohibitions that Sukuk need to adhere to:
- Prohibition of paying interest (referred to as riba);
- Prohibition against gambling or speculation (masir);
- Prohibition against unnecessary risk (gharar);
- Prohibition against taking unfair advantage (jahl); and
- Prohibition against corruption (rishwah).
Western jurisdictions refer to Sukuk as Islamic bonds. Generally, Sukuk are perceived to be similar to conventional bonds, however, there are a number of paramount differences between the two, which we shall try to outline briefly below.
Unlike what we are used to in conventional bonds, when an investor invests in Sukuk, the Sukuk grants him a portion of the asset in which the Sukuk monies are being invested in, as well as corresponding cash flows and risks related with the underlying asset.
The issue price or face value of the Sukuk is based on the market value of the underlying asset. On the contrary, investors investing in conventional bonds have title to interest-bearing debt instruments, with each bond representing a share of the debt. Unlike Sukuk holders, conventional bondholders do not have a share in the ownership of the underlying asset, project or business, and the face value of the bond is based on the issuer’s credit worthiness.
Moreover, Sukuk can only invest in Shariah-compliant assets which respect the principles of Islamic Law. On the other hand, conventional bonds may finance any asset, project or business venture which is compliant with the laws and regulations of the jurisdiction in which such bonds are being raised.
Sukuk and conventional bonds bear different costs as well. While conventional bondholders are not directly exposed to the costs associated with the underlying assets and such bonds are not correlated to the performance of the underlying asset, Sukuk holders are affected by such cost. This is because Sukuk holders own a share of the underlying asset, and thus lower costs will provide higher returns to such Sukuk holders and vice versa.
Sukuk may act as a bridge between those seeking to raise finance and investors who are on the lookout for new products which would allow them to diversify their portfolio of assets. Thus they have the potential to further develop the local capital market. Sukuk may also be employed by institutions or corporate entities to unlock funds tied up in assets through monetisation for the purpose of reinvestment.
Malta is warming up to the idea of attracting the concept and use of Islamic fiannce concepts in Malta, in fact, the Malta Stock Exchange has already launched the Islamic Equity Index. Although there are no legislative instruments or regulations which directly regulate Sukuk, current legislation is wide enough to accommodate the establishment of such vehicles. Moreover, the Maltese Government was discussing recently the reality of issuing the first sovereign Sukuk.
Although the concept of Sukuk for the local market is still a relatively alien concept, Malta is ideally located and able to act as a centre for Sukuk issues to cater for European and North
African projects.
[1] Definition of Investment Sukuk page 468 of Shar’iah Standards for Financial Institutions 2015, published by Accounting and Auditing Organisation for Islamic Financial Institutions.
