Global عربي
KSA عربي
Global عربي
The term sukuk is derived from the Arabic word sakk "صك" which means a legal instrument, deed, or cheque.
In Lisan al-Arab, sakk is defined as “to affix one’s seal on a document.” Since Arab traders traveled for business from their home countries to Africa and other regions, it is reasonable to believe that the term “cheque” originated from sakk. Additionally, the term sakk was also used during the time of the Holy Prophet (P.B.U.H), as mentioned in certain Hadiths.
Based on the two Hadiths mentioned above, we can conclude that the term sukuk was also used during the era of the Prophet (P.B.U.H). (Asiva Noor Rachmayani, 2015)
In recent years, the term Sukuk has become more common as Islamic financial institutions recognized the need for alternatives to treasury bills and bonds. For example, the Bahrain government successfully issued Salam Sukuk as an alternative to treasury bills and Ijarah Sukuk as an alternative to bonds. (Usmani, 2015)
The Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) defines investment Sukuk as documents of equal value that represent undivided shares in the ownership of assets, benefits, services, or specific projects or private investment activities.
This occurs after the value of the Sukuk is collected, the subscription is closed, and they are utilized for the purpose for which they were issued. (Ummah, 2019)
Meanwhile, the Securities Commission (SC) of Malaysia defines Sukuk as documents of equal value that represent undivided ownership or investment, in compliance with Shariah principles and rules, as approved by the Shariah Advisory Council (SAC). (Asiva Noor Rachmayani, 2015)
Sukuk funds are a type of Islamic financial instrument like conventional bonds, but they are structured in accordance with Shariah principles.
Sukuk funding is a method of raising funds for projects or other financial activities, ensuring compliance with Shariah by avoiding practices such as usury, gambling, and uncertainty.
1️⃣ Sukuk al Murabaha
Sukuk al Murabaha certificates of equal value issued to finance the purchase of a Murabaha commodity, and the Murabaha commodity becomes owned by the Sukuk holders.
2️⃣ Sukuk al Musharakah
Sukuk al-Musharakah are partnership certificates that represent projects or activities managed on the basis of partnership, with one of the partners or another party appointed to manage them.
3️⃣ Sukuk al Mudarabah
Sukuk al-Mudarabah are partnership certificates that represent projects or activities managed on the basis of Mudarabah, with the Mudarib appointed from among the partners or others to manage them.
4️⃣ Sukuk al Wakalah bil Istismar
Sukuk al-Wakalah bil Istismar are partnership certificates that represent projects or activities managed on the basis of an investment agency, with an agent appointed on behalf of the Sukuk holders to manage them.
5️⃣ Sukuk al Salam
Sukuk al-Salam are certificates of equal value issued to collect working capital for Salam, with the subject matter of the Salam being owned by the Sukuk holders.
6️⃣ Sukuk al Istisna
Sukuk al-Istisna are certificates of equal value issued to utilize the collected funds for producing goods, with the manufactured goods being owned by the Sukuk holders. (Ummah, 2019)
Traditional financing refers to a system where loans are obtained for projects through conventional methods, in which the borrower repays the principal amount along with interest over a specified period.
These loans are typically offered by conventional banks, financial institutions, or other private organizations.
Traditional financing includes loans like personal loan, business loan, mortgages and credit line and these types of loans are often contrasted with Islamic financial loans.
Based on the above definitions of Sukuk and traditional financing, Sukuk represents undivided ownership in specific assets or usufruct,
whereas traditional financing is not concerned with assets or usufruct; it simply represents a debt owed by an institution.
This is the key difference between raising funds through Sukuk and traditional financing. Below are some additional differences that clearly distinguish the two:
Both are tradable, in Sukuk the ownership of the specific assets is traded while in bonds the debt certificates are traded. (Asiva Noor Rachmayani, 2015)
📖 Related reading: Islamic View of Debt, Lending & Borrowing
In Sukuk, profit is distributed among the holders according to their proportionate share in the underlying assets, usufruct, or services, while losses are borne in proportion to their stake in the specific asset.
In contrast, interest payments do not involve an actual profit-generating mechanism; this system relies solely on interest-bearing instruments, which are paid to bondholders at the maturity date. (Usmani, 2015)
In Islamic jurisprudence, there is a principle that “Profit comes with risk” or “Gain is accompanied by loss.”
Since Sukuk are Shariah-compliant instruments, Sukuk holders are entitled to profits and are also exposed to risks.
In the event of a loss, the Sukuk holders will bear the loss in proportion to their ownership share in the underlying assets, usufructs, and services.
📖 Related reading: Gharar: What exactly it is & How to avoid it?
Disclamer:
This post is for educational purposes only, and does not constitute investment advice or a solicitation to take any financial action. It should not be relied upon when making investment or financing decisions
