An Introduction to Islamic Finance: Theory and Practice

Capital Markets 185

fl ows generated by underlying assets in a pool are passed to the sukuk hold-
ers (investors). It is similar to a conventional bond as it is also a security
instrument that provides a predictable level of return. However, a funda-
mental difference between the two is that a bond represents pure debt of the
issuer but sukuk represent, in addition to the risk on the creditworthiness of
the issuer, an ownership stake in an existing or well - defi ned asset or project.
Also, while a bond creates a lender/borrower relationship, the relationship in
sukuk depends on the nature of the underlying contract. For example, if the
underlying contract is a lease (ijarah), this creates a lessee/lessor relationship,
which is different from the typical lender/borrower relationship.
The core contract utilized in the process of securitization to create
sukuk is the mudarabah, which allows one party to act as an agent (man-
ager) on behalf of a principal (capital owner) on the basis of a pre - agreed
profi t-sharing arrangement. The mudarabah contract is used to create a
special - purpose mudarabah (SPM) entity similar to the conventional special -
purpose vehicle (SPV) to play a well - defi ned role in acquiring certain assets
and issuing certifi cates against the assets. The underlying assets acquired by
the SPM need to be Shari’ah - compliant and can vary in nature. The trad-
ability and negotiability of issued certifi cates is determined on the basis of
the nature of the underlying assets.
Figure 9.3 shows the process and linkage among the different players
involved in structuring sukuk. This is a generic process and there will be dif-
ferences depending on the type of underlying instrument used to acquire the
assets. The structuring process involves the following steps:

Step I: An asset is identifi ed, which is currently held by the entity wish-
ing to mobilize resources and raise funds. In simple cases, this asset needs
to be a tangible asset such as an offi ce building, land, a highway, or an

FIGURE 9.3 Anatomy of sukuk
Source: Iqbal (1999)

Pool of Assets

(Ijarah/Leases)

Credit Enhancement

Investors: IFIs, conventional

institutional investors, pension

funds, etc.

Special-purpose Mudarabah

“SPM”/“SPV”

Servicing

SPM Balance Sheet

Sukuk

Certificates

Assets Liabilities

Ijarah Assets

(Leases)

Funds Mobilizing

Entity