The word Sukuk is a plural of the Arabic term Sakk which has various meanings including 'legal instrument or deed' but is most commonly associated with cheque. This is indicated by the Persian poet Firdausi in his epic Shahnameh where several mentions of use of the Persian chak meaning letters of credit which in the post-Islamic Arabic documents appear as the Arabicized term Sakks.
Financial Bonds
A conventional financial bond as understood in western economic terms is a formal contract where money is repaid with interest at fixed intervals. Depending on the agreed terms of the bond the authorized issuer (debtor) owes the creditor interest to use the money and/or to repay the principal at a later date where the bond is said to have reached maturity.
A Consol Bond is slightly different in that it is a perpetuity (bond with no maturity).
In this way the bond can be said to be a security with the bondholder possessing a creditor stake.
Islamic Bonds
Sukuk differ from conventional bonds in that they are compliant with Islamic law and its investment principles. Most specifically they do not deal in interest or riba which is explicitly outlawed in the Qur'an.
The use of Sukuk was primarily used in the transferring of financial obligations originating from trade and other commercial activities and were used extensively in Medieval Islamic Empires.
In the Modern age the term Sukuk is related more to asset monetization in reference to the securitization of when the Sukuk is issued. The major difference between the conventional financial bonds and the Sukuk in this instance is that whereas conventional bonds are seen as a promise or obligation to repay a loan the latter is a partial ownership in a debt referred to specifically as Sukuk Murabaha.
Different Types of Islamic Bonds
The Sukuk Murahaba is one type of Islamic bond that is specific to part ownership in debt. Other types of Sukuk which are also based on part ownership are Sukuk Al Ijara (Assets), Sukuk Al Istisna (Project), Sukuk al Musharaka (Business) and Sukuk Al Istithmar (Investment).
Islamic Bonds in the Market
At present Islamic finance products including Sukuk are proving increasingly popular with CIMB Group Holdings the top underwriter of Islamic bonds stating in 2010 that sales of Sukuk may rise by 24% in 2010 to reach a global value of $25 billion.
This seemed slightly optimistic however with alternate observers noting that the Islamic bonds sales in the Middle East had decreased in value each year since 2007 with a recovery being staged in 2011.
In 2009 the Vatican Newspaper Osservatore Romano suggested that Western Banks could use Sukuk as collateral as a way of instilling confidence amongst clients amongst the general dismay and panic of the 2007-2009 financial crisis.
Faisal Hanif - I graduated in 2008 from the University of Leicester with Bachelor Hons in History. I have recently completed a Masters in the History of ...
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