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Islamic Capital Markets: Theory and Practice by Noureddine Krichene

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Chapter 20

Sukuks

Islamic finance offers a broad range of structured products in the form of sukuks.1 In addition to structured products based on derivatives, issuers and investors have sukuks as a financial instrument to meet their financing and investment needs, respectively. Their choice would be influenced by their risk-preferences and risk–return factors of each type of structured product. Sukuks are Islamic bonds that play an increasing role in large-project financing in public and private sectors, in financing working capital, and in refinancing. Similar to conventional bonds, they offer institutional investors placement opportunities that may fit their investment strategies. They may also offer individual investors instruments for retirement planning and other longer-term investment. In the same fashion as derivatives-based structured products, sukuks are structured securities. They are asset-backed, stable income, tradable, and Sharia-compatible trust certificates. These products have an objective to enable borrowers to raise capital in a Sharia-compliant fashion and to expand the investors’ base by offering investment opportunities in a new class of assets that are Sharia-compliant.

The primary condition for issuance of sukuks is the existence of assets on the balance sheet of the government, the corporate body, the banking and financial institution, or any entity that wants to mobilize financial resources. The identification of suitable assets is a key step in the process ...

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