Sukuk: History and Development

The Definition Of Sukuk

There have been many definitions for Sukuk derived from previous studies and from recognized organizations globally and locally within Malaysian context (Ahmed, Islam, Alabdullah, & Amran, 2019; Ahmed, Islam, & Amran, 2019). According to Al-Jumuah (2000), Sukuk is a property certification. Sukuk is also sometimes referred as Islamic bonds or Sukuk sanadat (negotiable papers) and ownership (Al-Bastawaisi, 2006). In comparing Sukuk to bonds, Sukuk has a more generalized meaning than bonds (Ahmed, Islam, & Alabdullah, 2014). Furthermore, Sukuk refers to securities characterized as compliant with Islamic Shari’ah rules and with the principles of investment which prohibit and prevent dealings with interest charges (LMC, 2008). In addition, as mentioned by Al-Buolayan, (2006) and LMC (2008), Sukuk is represented by its stability, being asset-backed, compatible with Shari’ah rules and could be considered a trust certificate. The Accounting and Auditing Organization for Islamic Financial Institutions (AAOFI, 2012) defines Sukuk as “Certificates of equal representing undivided shares in ownership of tangible assets, usufructs and services or (in the ownership of) the assets of particular projects or special investment activity.” There are several kinds of Sukuk. Nevertheless, the common ones, as mentioned by AAOFI, are: Musharakah Sukuk; the Ijarah Sukuk; Murabahah Sukuk; Mudarabah Sukuk; Istisna Sukuk; Salam Sukuk; and the Hybrids.

The Islamic Financial Services Board (IFSB) defines “Sukuk (plural of Sakk), frequently referred to as ‘Islamic bonds’, are certificates with each Sakk representing a proportional undivided ownership right in tangible assets, or a pool of predominantly tangible assets, or a business venture. These assets may be in a specific project or investment activity in accordance with Shari’ah rules and principles” (IFSB, 2009).

On the other hand, the Malaysian Debt Securities and Sukuk Market (BNM) (2009) provides another definition to explain Sukuk as follows: “Certificates of equal value that represent an undivided interest (proportional to the investor’s interest) in the ownership of an underlying asset (both tangible and intangible), usufruct, services or investments in particular projects or special investment activities.” Also, the Securities Commission (SC) Malaysia (2012) has defined Sukuk as “… any securities issued pursuant to any Shari’ah principles and concepts approved by the Shari’ah Advisory Council (“SAC”) of the SC as set out in Appendix 1 … (and subsequently) Appendix 1 (B): A document or certificate which represents the value of an asset” (SC, 2004 & SC, 2009).

Al-Buolayan (2006) stated that the Sukuk Security Model is derived from traditional securitization procedures that are based on a special purpose vehicle (SPV) which lies in gaining assets and issuing of financial compensation on these assets. Such assets represent appropriate aspects with beneficial ownership to the Sukuk investors.

The Sukuk issuance process lies in the following steps (LMC, 2008)

• 1.

  A feasibility study must be prepared in detail

• 2.

  A general framework is to be prepared in addition to setting up an organizational structure

• 3.

  The work should be in line with the structure and principles of Shari’ah

• 4.

  Conducted by a leading manager

• 5.

  Arrangement of agreed Islamic legal documentation;

• 6.

  Arrangement of special purpose vehicles (SPV) to represent Sukuk holders

• 7.

  Circulation of the Sukuk into the financial markets.