Sukuk is no longer a new concept in financial markets.
Joining the sovereign and quasi-sovereign entities
that have issued sukuk are European countries such as
the UK and Luxembourg, as well as Asean countries such as
Singapore, Malaysia, Indonesia and even further east to Hong
Kong. Popularly referred to as Islamic bonds, a sukuk
is anything but a bond. Bonds typically involve an element of
lending and interest payment, and Islam prohibits the payment
of interest. Bonds represent in effect a lending transaction
with a payment obligation of more than the amount being
borrowed. Shariah, which is an embodiment of Islamic
laws, prohibits such lending transactions. It is a
misconception that lending per se is prohibited under
Shariah. Islam sees lending as a charitable act and in
that perspective encourages it. In fact Islam goes further to
enjoin to even grant indulgence of time and forgive debts where
the debtor cannot afford to repay. What is prohibited is to
impose an obligation to be repaid more than what is lent.
Interest is thus prohibited.
So what then is a sukuk? The Accounting and
Auditing Organisation for Islamic Financial Institutions
(AAOIFI) defines sukuk as certificates of equal value
representing undivided shares in the ownership of tangible
assets, usufructs and services or (in the ownership of) the
assets of particular projects or special investment activities.
Based on this definition, sukuk can hardly be said to
represent the typical principal and coupon of a bond. A
sukuk can be structured to create a payment obligation
nonetheless but on transactions not based on lending. Hence the
use of the terminology of principal payment and profit (or
expected profit) where sukuk are involved is in most
cases one of convenience. Many sukuk in fact do not
embody 'principal' payment as being outstanding on the date of
issuance but are structured to be outstanding and due at the
point of maturity. This is a major difference often missed. The
'profit' coupons in sukuk are structured as payment
obligations that are due periodically, which makes structures
using leases or rentals a good fit. Key to understanding
sukuk structures is the way the payment obligation is
created, as there is no one way of structuring sukuk.
For example, Malaysia's sovereign sukuk and the
Petronas sukuk, both issued this year, were not
structured the same way as the issuers' previous sukuk
issuances. Being a relatively new financial instrument, as yet
there is no such thing as a standard sukuk.
Dato Andri Aidham Badri