Sukuk Securities: New Ways of Debt Contracting

CHAPTER 2 Sukuk Securities: Definitions, Classification, and Pricing Issues

The foundation principles for sukuk certificates have developed in conformity with Islamic legal principles based on the Quran’s commandments and elaborated in Shari’ah through 14 centuries of development. The word sukuk is not found in the Quran; it emerged as a development in the application of the Quran’s principles to the real human act of debt funding.

The practice of borrowing and lending with asset backing (or assets that would be created from such debt) for specific production activities was widely known in the pre-Islamic Middle East and Mediterranean regions. Such debt transactions were practiced as risk-shared and profit-shared loans to be liquidated over mostly finite periods. The shorter the production process—for example, working capital loans (istisna) taken by producers of goods—the shorter the duration of lending. These practices were adapted by scholars who applied doctrinal provisions of Islam and refined them as Islamic debt instruments to make funding possible for economic activities.

By the late 19th century, which also coincided with the demise of Islamic empires in most parts of the world, the use of sukuk slowly waned, being replaced with modern banking practices and the introduction of modern financial instruments based on no risk sharing and prenegotiated interest payments. After about four decades, during which profit-sharing and risk-sharing banking was reintroduced, the ...