Sukuk

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Sukuk is an Arabic term in plural (singular Sakk) meaning certificates. It is the root of the English word for cheque.

Sukuk are securitised assets or business. Unlike conventional ABS structures, Sukuk need to have an underlying tangible asset transaction either in ownership, usufruct or business. Most Sukuk issued, however, rely on the credit risk of the issuer rather than on the quality of the assets. They are structured to have a similar pay off and risk/return profil like conventional (in Islamic law impermissible) bonds, which are based on loan contracts instead.

Limited Applications

The securitisation of pure cash flow streams from credit portfolios as undertaken in the mortgage market, for instance, cannot be structured in the same way. One example of this limitation is with murabaha sukuk, which cannot be traded at values other than par because the certificateholder does not have claim on a tangible asset and instead only has claim to a stream of future cash flows. The Islamic Development Bank has issued several sukuk that are hybrid sukuk based on a pool of ijara, istisnaa and murabaha contracts. To ensure Shari'ah-compliance and tradability, the sukuk assets with few exceptions must be composed of at least 51% ijara contracts. Because an ijara contract transfers ownership of an asset to the certificateholder, it is allowed to be traded at values other than its par value.

Notable defaults

A properly designed Sukuk limits the debt to no more than the value of the underlying assets. However, in certain cases like the decline in real estate values backing sukuk in the recent financial crisis, the assets may not be sufficient to cover the value of the sukuk. Also, the issuer may run into cash flow problems that leads to a formal default under the sukuk offering circular or prospectus. In cases of default, there are few instances where the default has been resolved through the legal system and there remains significant uncertainty about how defaults are resolved.

  • Saad and Algosaibi Group
  • The Investment Dar
  • East Cameron Partners

Further reading

Bibliography

External Links