Investing In Islamic Funds: A Practitioner's Perspective

CHAPTER 9

The Sukuk Portfolio

A Broader Investment Universe for Mainstream Investors

O ye who believe! Fulfill your undertakings.

(Al Maeda: 1)13

INTRODUCTION

According to Global Islamic Finance Report (2012), it is regrettable that the Goldman Sachs global Sukuk, which was assigned by Moody’s a (P)A1 rating on November 3, 2011, and assigned an A+/F1+ rating by Fitch on October 19, 2011, was not acceptable as a Shariah-investible asset. It appeared to adopt a controversial structure geared toward the conventional finance needs of the investment bank, which involve opportunities for riba, or interest.1 This is a unique case because it seemed that the proceeds of the Sukuk would be used in a noncompliant manner. This has yet to be accepted and offered.

However, investors should take comfort that all existing approved Sukuks in the market are deemed Shariah compliant from the standpoint that all Sukuk proceeds are used for purposes of productive economic activities, which benefit mankind. Put simply, Sukuk refers to fixed-income instruments (or bonds) that are structured based on Shariah principles. As the earning of interest is forbidden in Islam, therefore traditional interest-paying bonds structures are unacceptable in Islamic investing.

Sukuks are investment certificates consisting of ownership claims in a pool of assets, whereas bonds are interest-bearing securities. The claim embodied in Sukuk is a claim to both cash flow and ownership. A bond is a debt obligation, meaning ...