بسم الله الرحمن الرحيم

 14 Rabi ut Thaani 1446/18 October 2024

All praise is due to Allah, the Cherisher, Sustainer, Nourisher and Provider of the entire creation. May peace, blessings and salutations be upon our Beloved Prophet Muhammed ﷺ.

WHAT IS A SUKUK?

A Sukuk is an equal-value Shariah-compliant certificates or securities that reflect undivided shareholdings in tangible property, usufruct rights, and services. Sukuk is the most popular Islamic debt market product and is typically translated as “Islamic bonds.” Unlike traditional bonds, which are financial debt instruments, holders of sukuk acquire direct equity holdings in physical assets. (Desai, 2015)

The share or ownership of tangible assets are what entitle sukuk-holders to obtain periodic fixed returns hence upon maturity of the sukuk, sukuk-holders have full redemption.

ASSET BACKED SUKUKS

Asset-backed sukuk are a type of asset/business venture that is fully shifted to the Special Purpose Vehicle (SPV) with elements or a true sale. The only object of recourse for sukuk-holders is the asset. As a result, the value of the sukuk that the investors own is directly impacted by the asset’s impairment or non-performance. The Islamic Financial Services Board (IFSB) states that under an asset-backed sukuk, the investors will be responsible for any losses caused by the assets impairment and that they have recourse to the assets rather than the originator. (Shabana M, 2013)

Importantly, asset-backed sukuk typically offer a range of advantages to both investors and originators. This sort of sukuk is also seen to operate more in accordance with the principles and spirit of Shari’ah (Maasid al-Shari’ah). Significantly, asset-backed sukuk are linked to three key requirements: their profit and loss structure, true-sale requirement, and actual ownership, which aligns them with Shari’ah standards.

Within asset-backed sukuk, it is where legal and beneficial ownership of the underlying assets are transferred to the sukuk holders. (Qatar Financial Centre, n.d.) Recourse of the investors is to the asset-issuing vehicle and the sukuk investors bear any losses in case of impairment of the sukuk.

Sukuk holders only have recourse to the asset thus the asset plays a genuine role in defaults.

ASSET BASED SUKUKS

Asset-based sukuk are a type of asset/business venture that give the originator or issuer complete recourse, but not to the asset itself. The originator does not actually sell the underlying asset to the sukuk investor. The sukuk investor won’t actually own the asset; instead, they will only get beneficial ownership.

The asset-based sukuk are primarily designed to resemble traditional bonds. Additionally, rather than being based on a percentage of overall earnings, dividends are calculated as a percentage of the whole amount “invested” (much to how interest payments are calculated as a percentage of the total amount of a given loan). (Shabana M, 2013)

Asset-based sukuk are also frequently referred to as “Islamic bonds” and are treated as bonds for taxation purposes under the law. According to IFSB, in an asset-based sukuk, the investors have to recourse either to the originator (via purchase undertaking) or the issuer (via guarantee).

Asset-based sukuks are where only beneficial ownership of the underlying assets is transferred (through a trust) to the sukuk holders.

The recourse of the investor is to the creditworthiness of the ultimate obligor. Purchase undertaking at par from the obligator is the ultimate recourse. The recourse is only to the obligator and not the asset.

May Allah accept our efforts from us and grant us understanding In Sha Allah!

References

Desai, M. I. (2015). Your Brief Guide to Islamic Finance.

Qatar Financial Centre. (n.d.). IBANK 10.1.4 Categories of sukuk according to ownership of assets | Rulebook. Qfcra-En.thomsonreuters.com. Retrieved October 15, 2022, from https://qfcra-en.thomsonreuters.com/rulebook/ibank-1014-categories-sukuk-according-ownership-assets

Shabana M, H. (2013). Asset Backed & Asset Based Sukuk: An Introduction. ISRA – Bloomberg.