The World of Sukuk

The origin of Sukuk (or sak – singular of sukuk) dates to around the 8th century AD, where it represented financial obligations used to facilitate trade and other commercial activities amongst merchants by serving as a promissory note.

The Accounting and Auditing Organisation for Islamic Financial Institutions (AAOFI) describe Sukuk as:

"certificates of equal value representing undivided shares in ownership of tangible assets, usufruct and services or (in the ownership of) the assets of particular projects or special investment activity, however this is true after receipt of value of the Sukuk, the closing of subscription and the employment of funds received for the purpose for which the Sukuk were issued[1] ."

The first and most important principle in Islamic finance is that transactions should be related to real productive economic activities. This means that speculative transactions including those which are purely paper / monetary transactions are forbidden.

Specifically, there are five prohibitions that Sukuk need to adhere to:
  • Prohibition of paying interest (referred to as riba);
  • Prohibition against gambling or speculation (masir);
  • Prohibition against unnecessary risk (gharar);
  • Prohibition against taking unfair advantage (jahl); and
  • Prohibition against corruption (rishwah).
In the western world, Sukuk are referred to as Islamic bonds. While the general perception is that Sukuk are similar to conventional bonds, there are a number of key differences between the two, which we will try and briefly explain and elaborate.

When investors, invest in a Sukuk, the Sukuk, unlike conventional bonds, grant an investor a portion of the asset in which the Sukuk monies are being invested in, along with the corresponding cash flows and risks related with the underlying asset.

The issue price or face value of the Sukuk is based on the market value of the underlying asset. On the other hand, investors investing in conventional bonds have title to interest-bearing debt instruments, with each bond representing a share of the debt. Unlike Sukuk holders, conventional bondholders do not have a share in the ownership of the underlying asset, project or business, and the face value of the bond is based on the issuer’s credit worthiness.

Another distinct difference between conventional bonds and Sukuks is the fact that while conventional bonds may finance any asset, project or business venture which is compliant with the laws and regulations of the jurisdiction in which such bonds are being raised, on the contrary, Sukuk can only invest in Shariah-compliant assets. Such assets would therefore need to respect the principles of Islamic Law.

The costs related to Sukuks and conventional bonds are also different. Conventional bondholders are not directly exposed to the costs associated with the underlying assets and such bonds are not correlated to the performance of the underlying asset. On the other hand, Sukuk holders are affected by such costs, since the Sukuk holders own a share of the underlying asset, which means that lower costs will provide higher returns to such Sukuk holders and vice versa.

Sukuks have the potential to further develop the local capital market as they can act as a bridge between those seeking to raise finance and investors who are thirsty for new products which would allow them to diversify their portfolio of assets. Sukuk can also be used by institutions or corporate entities to unlock funds tied up in assets through monetisation for the purpose of reinvestment.

The Maltese Stock Exchange has already launched the Islamic Equity Index indicating that it is willing to attract the concept and use of Islamic Finance concepts in Malta. While there isn’t any specific law or regulation in respect of Sukuk, current legislation is wide enough to accommodate the establishment of such vehicles. Moreover, in the recent past the Maltese Government was discussing the reality of issuing the first sovereign Sukuk.

The concept of Sukuks for the local market may still be new; however, Malta is ideally located and able to act as a centre for Sukuk issues to cater for European and North
African projects.

[1] Definition of Investment Sukuk page 468 of Shar’iah Standards for Financial Institutions 2015, published by Accounting and Auditing Organisation for Islamic Financial Institutions.



Nicholas Warren
Manager - Corporate Services
Chetcuti Cauchi Advocates


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