Sukuk: Is common ownership in an asset with an expected steady returns

Hamdan has been exploring Sukuk with a view to including them in his portfolio. He was pleasantly surprised to see Sukuk listed across all major global stock exchanges. Designed to be Shari’a alternative to conventional bonds, Sukuk are Shari’a-compliant financial certificates that provide common ownership in an asset for a set period after which the seller commits to buy them at a predetermined price on a particular date. 

Investors considering Sukuk come across various types, including Ijarah, Wakala, Murabaha, and Mudarabah, among others, based on how they are structured. The structure varies depending on the industry and type of investment in sectors such as infrastructure, leasing, and trade.

Once you invested in a Sukuk, the expected return on investment comes to each owner in the form of profit from a sale, rental, or a combination of these. A Sukuk’s value is linked to the asset backing it, which means there is a potential for appreciation if the asset’s value increases, and vice versa.

How do you get returns from investing in Sukuk?

• Rental income from Sukuk al-Ijarah: The most popular Sukuk provides returns to investors in the form of periodic rental payments from a leased asset.
• Profit sharing in Sukuk al-Musharakah/Mudarabah: Investors receive expected returns based on the performance and profit generated by the specific project or managed investment.
• Cost + sale in Sukuk al-Murabaha: Used for short-term financing, these work on the basis of a predetermined profit margin, the certificates of this type of Sukuk are not tradable in the secondary market from Shari’a perspective.
• Capital gains: To take advantage of any market price increases in the value of the underlying asset, investors can sell their Sukuk certificates in the secondary market before maturity.
• Repayment at maturity: Typically, on maturity, like most financial instruments, the issuer buys back the certificate on the principal value.

  How are Sukuk and bonds different?

  Sukuk are the Shari’a-compliant investment alternative instrument to conventional bonds. Although both Sukuk and bonds are financial assets that can be transferred and traded, and both can also be rated for safety and value. However, the two are not the same.

• A bond is a financial instrument in the form of a contractual obligation requiring the issuer to pay to bondholders, on specified dates, both interest and principal. Sukuk-holders, however, acquire the ownership in the underlying assets proportionate to the value of the instrument, and Sukuk returns are derived from these assets. This makes Sukuk-holders entitled to share in the revenues generated by the Sukuk assets as well as a share in the proceeds once they are sold.
• Because they are backed by a real asset, Sukuk are considered safer in times of volatility.