Islamic bonds, sukuk, are structured to generate returns to investors without infringing Islamic law.
Undivided shares in tangible assets relating to particular projects or special investment activity make up sukuk funds. A sukuk investor has a common share in the ownership of the assets which are linked to the investment.
Sukuk is unlike conventional bonds which are based on a contractual obligation to pay interest to bond-holders. Instead, the sukuk holder’s income is linked to the performance of the underlying asset which is usually measured in a fixed period of time.
This also exposes the bond-holder’s investment to the risk that the asset may lose value.
Since 2000, sukuk have become important Islamic financial instruments in raising funds to finance long-term projects. Malaysia issued the first sukuk in 2000. Bahrain followed in 2001. Since then both the corporate sector and countries have used sukuk to raise alternative financing.
The most common sukuk structures copy the cash flows of conventional bonds. Such structures are listed on stock exchanges. Debt certificates can only be bought before the finance occurs and then held to maturity, from an Islamic perspective. This is critical for debt trading at market value without incurring the prohibited riba, interest, on money.
The sukuk industry has in general led the way in humanitarian Islamic financing. For example, the International Finance Facility for Immunisation (IFFIm) have developed – with the support of the World Bank – a unique life-saving Islamic investment vehicle.