106 Islamic Finance in Practice
and Auditing Organization for Islamic Financial Institutions (AAOIFI)
Standard 17 defines “investmentsukuk” as being:Certificates of equal value representing after closing subscrip-
tion, receipt of the value of the certificates and putting it to use as
planned, common title to shares and rights in tangible assets,
usufructs and services, or equity of a given project or equity of a
special investment activity.Sukukshould not be confused with conventional shares or bonds. Shares
are issued by a stock company that has been granted independent juristic
personality. In the case of bonds, the bond holder enters into a debtor-lender
relationship with the bond issuer. In its simplest form, abondisacontractual
debt obligation whereby the issuer is contractually obliged to pay to
bondholders, on certain specified dates, interest and principal. In compari-
son, the design of thesukukis derived from the conventional securitization
process in which a special purpose vehicle is set-up to acquire assets and to
issue financial claims on the asset. Such financial claims represent a
proportionate beneficial ownership for a defined period when the risk and
the return associated with cash flows generated by an underlying asset is
passed tosukukholders (investors). Hencesukukholders are entitled to
share in the revenues generated by thesukukassets as well as being entitled
to share in the proceeds of the realization of those assets.
On the other hand, there are a number of similarities between a
conventional bond and asukuk. These include:- Marketability−sukukare monetized real assets that are liquid, easily
transferred and traded in the financial markets; - Ratability−sukukcanberated;
- Enhanceability−differentsukukstructures may allow for credit enhance-
ments; and - Versatility− the variety ofsukukstructures defined in the AAOIFI
standards allow for structuring across legal and fiscal domains, fixed and
variable income options, etc.
Recently there has been a claim thatsukuksare asset backed rather than
asset based. In an asset-basedsukuk,sukukholders rely for payment on the
company seeking to raise finance (the originator), in the same way as they
would under a corporate bond issue. In an asset-backedsukuk,sukukholders
rely on the assets of thesukukfor security. In the case of asset-basedsukuk,
the market value of the underlying assets has no bearing on the redemption
amount as this is fixed at the outset when the relevant undertakings are
agreed. As will be shown below,sukukstructures are essentially asset-
based, but the modern structuring techniques have tended to retain the
major risk of the asset with the originator of thesukuk.