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Sunday, 2 December 2007

Introduction to Sukuk - What is a Sukuk?

What is a sukuk?

A number of different Islamic financing techniques and products have been developed in accordance with the above principles and one of these is the Sukuk. Although the Sukuk is sometimes referred to as the Islamic bond it is better described as an asset based investment as the investor owns an undivided interest in an underlying tangible asset which is proportionate to his investment. The Sukuk certificate evidences this ownership interest. Monies raised by the issue of the sukuk note are used to invest in an underlying asset, a trust is declared over that asset and thereby the certificate holder will own a beneficial interest in that asset in proportion to its investment and is therefore entitled to all the benefits that entails including a proportion of the return generated by that asset.

Prior to the development of the sukuk product there was a scarcity of Islamic products that could provide a mid to long term investment and which could readily be traded in the secondary market, both from a practical perspective and from a Shari'a perspective. The sukuk is ideal from the perspective of the Islamic investor and, given that it is an ownership interest in a real underlying asset and not just a debt instrument, is a freely tradeable instrument. As such it is not surprising there has been a significant increase in the volume, size and frequency of deals over the last few years. Total issues in 2002 reached approximately US$1 billion but for the twelve months ending with August 2006 total issues are estimated to be in the region of US$12 billion. Although the overall volumes are still insignificant in comparison to the global conventional bond market, the rate of growth in the market is unprecedented. The early issues were sovereign, most of the recent issues have emanated from the corporate market and given the continuing desire for the corporate sector to tap into the Islamic market as an alternative source of funding this a trend that is likely to continue for the foreseeable future.

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