All about Islamic bonds (Sukuk)

Sukuk is the Arabic name for financial certificates, but commonly refers to the Islamic equivalent of bonds. Since fixed income interest bearing bonds are not permissible in Islam, Sukuk securities are structured to comply with the Islamic law and its investment principles, which prohibits the charging or paying of interest.

Recent innovations have changed the dynamics of the Islamic finance industry. Specially in the area of bonds and securities the use of Sukuk or Islamic securities have become increasingly popular in the last few years, both as a means of raising government finance through sovereign issues, and as a way of companies obtaining funding through the offer of corporate sukuk. According to the International Islamic Financial Market (IIFM) Report 2011, Sukuk have predominantly functioned as domestic financing instruments; 89% of global Sukuk issues up till early 2010 have been domestic issues. Sukuk have generally been used as short, medium to long term financing instruments, the majority of issues ranging between 1 to 3 years (47.1% of issuance by value) and the remaining being as long as 15-20 years.

International Finance institutions such as the World Bank through its affiliate, the International Finance Corporation (IFC), issued its first Sukuk in 2004, a USD 132 million 3 year bullet Sukuk, which was denominated in the local Malaysian currency, the ringgit. This was followed in 2009 with the IFC Hilal Sukuk, a US dollar-denominated USD 100 million non-amortizing issue with a 5 year maturity, and was listed on NASDAQ Dubai and Bahrain stock exchanges. The Malaysian Stock Exchange accounts for the highest number of listed by the first quarter of 2011 with USD 28.09 billion (IIFM Report 2011).

The Islamic Development Bank (IDB) is also an active participant in the global Sukuk market. It issued its first USD 400 million Sukuk in 2002, and followed up with a number of issues, including the last issue of USD 750 million in 2011.

Germany launched Europe’s first Sukuk in 2004 with German Federal State of Saxony-Anhalt issuing a Euro100m, 5-year, AAA-rated Sukuk. The Sukuk was fully subscribed with 60% of the issue taken by investors in Bahrain and the United Arab Emirates whilst 40% to investors in Europe, particularly France and Germany.

The first Sukuk to have originated from the United States was the East Cameron Gas Sukuk issued in 2006. The unique feature of this Sukuk was that it was the first ever Shariah compliant gas backed securitisation and first ever Islamic securitisation rated by Standard and Poor’s. The USD 165.67 million Sukuk originated from Houston based East Cameron Partners, whose reserves are located in the shallow waters offshore of the State of Louisiana.

The first Sukuk issued by Dubai’s national airlines, Emirates, closed in July 2005. At USD 550 million, this was the single largest corporate Sukuk issuance at that time. The proceeds of the issue, which is listed on the Luxembourg Stock Exchange, was used to finance the new Emirates Engineering Centre and their headquarters building in Dubai.

The US Company, General Electric (GE) issued USD$500 million Sukuk Ijarah in 2009. Other International issuers that have tapped into the Sukuk market include International Innovative Technologies (IIT); Nomura; Shell Malaysia and Tesco Malaysia.

Sukuk has developed as one of the most significant mechanisms for raising finance in the international capital markets through Islamically acceptable structures. Multinational corporations, sovereign bodies, state corporations and financial institutions use international sukuk issuance as an alternative to syndicated financing. 

What are sukuk? How are they structured? And how are they different from the conventional bonds?

Sukuk in general may be understood as a shariah compliant ‘Bond’. In its simplest form sukuk represents ownership of an asset or its usufruct. The claim embodied in sukuk is not simply a claim to cash flow but an ownership claim. This also differentiates sukuk from conventional bonds as the latter proceed over interest bearing securities, whereas sukuk are basically investment certificates consisting of ownership claims in a pool of assets.

A distinguishing feature of a sukuk is that in instances where the certificate represents a debt to the holder, the certificate will not be tradable on the secondary market and instead is held until maturity or sold at par.

Benefits and Features of Sukuk: Tradable shariah-compliant capital market product providing medium to long term fixed or variable rates of return. Assessed  and rated by international rating agencies, which investors use as a guideline to asses risk/return parameters of a sukuk issue; Regular periodic income streams during the investment period with easy and efficient settlement and a possibility of capital appreciation of the sukuk; Liquid instruments, tradable in secondary market.

No doubt, all these benefits of the global Islamic bond market necessitated the Federal Government of Nigeria to issue the Sukuk guidelines through the Securities Exchange Commission (SEC). It is now left for the Governments – Federal, State and Local, Corporate Organizations and Quasi-Government Corporations to tap into this very profitable financing structure. However, Osun Stae Government of Nigeria took the first step by issuing a 11.4 billion Naira Sukuk in 2013, which was over subscribed.

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