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Sukuk
Practical Law Glossary Item 6-500-6956 (Approx. 3 pages)
Glossary
Sukuk
Singular Sakk. Sharia-compliant certificates that represent an undivided ownership interest in an underlying tangible asset proportionate to the value of the holder's investment. The certificates entitle the holders to receive a pro rata share of the cash flows or revenues generated by and from the underlying tangible asset.
Sukuk are often compared to bonds, but there are fundamental differences:
- Sukuk are not debt obligations. Rather, they represent the sukuk holders' ownership interests in a particular pool of assets.
- In compliance with Sharia principles, sukuk holders are not entitled to receive interest. Instead, they receive a portion of the revenues generated by the assets they own. If no revenues are generated, the sukuk holders are not entitled to any returns.
Although not technically correct, sukuk is sometimes used colloquially as the singular and sukuks as the plural.
There are 14 sukuk structures accepted by the Accounting and Auditing Organization for Islamic Financial Institutions, including sukuk al-ijara, sukuk al-salam, and sukuk al-musharaka. Many of these sukuk are structured as follows:
- The entity seeking capital (originator) establishes a special purpose vehicle (SPV).
- The SPV issues certificates to investors in exchange for cash.
- The SPV purchases assets from the originator using the proceeds of the sukuk issuance that it holds in trust for the investors.
- The assets generate revenues (whether through a lease transaction (ijara) or another Sharia-compliant financing technique) that are used to return a profit to the investors in accordance with their ownership interests.
For more information on Islamic finance in the US, see:
For more information on Islamic finance in the UK, see Practice note, Islamic finance: UK law overview.