Have you heard about Sukuk ? It is an Islamic financial certificate, similar to a bond in Western finance. It complies with Sharia, Islamic religious law.
Definition and Origin of Sukuk
Islamic Financial Services Board defines
Certificates that represent the holder’s proportionate ownership in an undivided part of the underlying asset where the holder assumes all rights and obligations to such asset.
Introduction to Sukuk Market
– Sukuk usually translated as Islamic bond is the most active Islamic debt market instruments. It provide alternative funding avenue for corporate entities and the government, besides the bank funding.
Benefits of sukuk
– There are many benefits of sukuk such as :-
- Liquidity Management
Sukuk with different majorities combined with an active secondary market provide an excellent tool for Islamic Finance Institutions to help manage the liquidity.
A financial institution with excess liquidity may choose to invest in Sukuk that will offer a return and can be traded if required.
It can provide a tool for corporates who are in need of cash for specific objectives to raise the necessary refunds.
It can be used by an Islamic Finance Institution or a corporate as a means to release in funds tied up in assets through securitisation and than to reinvest the proseeds.
- Balance Sheet Management
It can be used by corporates to achieve an optimum balance between debt and equity on their balance sheet. (Sukuk.info )
Overview of Sukuk
1. Funds raised must be used for Shariah compliant (halal) activities.
2. Fund raised may be used to finance needed tangible assets since Sukuk unlike conventional bonds cannot be used for general financial needs of the issuer.
3. Sukukholders have a right to the ownership of the underlying asset and its cash-flows.
4. Income received by sukukholders must be derived from the cash flows generated by the underlying.
5. Clear and transparent specification of rights and obligations of all parties to the transaction, in particular the originator and sukukholders.
6. No fixity in returns.
Source :- Bank Islam