Sukuk Securities: New Ways of Debt Contracting

CHAPTER 3 Pragmatic and Idealistic Approaches to Structuring Sukuk^*

Sukuk are Islamic securities that are often translated as “Islamic bonds.” However, that translation does not entirely cover the substance of sukuk. A closer look at sukuk shows that it has elements that might resemble both shares and bonds, depending on the applicable underlying Islamic financial contract terms and structures. In this chapter we will outline the background of sukuk to provide a better understanding of it as an Islamic financial instrument.

This chapter aims to illustrate the discrepancies in the idealistic approach toward sukuk structures. That is, how this financial product should ideally be structured from a Shari’ah participatory perspective is compared to the pragmatic approach that has been adopted at this early stage of the product’s market development in 2014.

In order to place sukuk in context, some relevant concepts associated with Shari’ah will be briefly mentioned. These include key sources of Shari’ah as well as the concepts of ijtihad, riba, and gharar (defined later). In the following historical overview of sukuk, we provide particular focus on the origins of the word sukuk, its use in medieval times, and the recent history of sukuk, which are known today as new financial instruments in financial and capital markets. Finally, the development of several forms of sukuk will be described, and a number of structures and mechanisms will be explained that have been developed in practice ...