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Thursday, 14 August 2008

Sukuk – Islamic equivalent of bond

SUKUK is the Arabic name for a financial certificate but is the Islamic equivalent of a bond. Complying with the Islamic Shariah principles, a sukuk cannot charge or pay interest.
Shariah requires that financing should only be raised for trading in, or construction of, specific and identifiable assets, hence returns and cash flows from such instruments will be linked to assets purchased or those generated from an asset once constructed and not simply be income that is interest based.
The sukuk ‘Ijarah’ (an Islamic bond which applies a sales and lease arrangement) is an asset-backed instrument, which discourages over-exposure of the financing facility beyond the value of the underlying asset, given that the issuer cannot leverage in excess of the asset value.
The other sukuks are ‘Mudaraba’ (for enhancing public participation in big investment projects); Musharaka (for mobilising funds for establishing a new project or developing an existing one or financing a business activity on the basis of partnership contracts); ‘Murabaha’ (feasible in primary market).
‘Salam’ (created and sold by a special purpose vehicle under which the funds mobilised from investors are paid as an advance in return for a promise to deliver a commodity at a future date); ‘Istisna’ (for mobilising the funds required for producing products that are owned by the certificate holders) and hybrid (the underlying pool of assets can comprise ‘Istisna’, ‘Murabaha’ receivables as well as ‘Ijara’).

(Gulf Times)

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