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Sukuk

Comprehensive sukuk study resources, with structure diagrams, detailed overview of structures, key features of the underlying structure, required documentation, related structures and market developments.

Lessons

Sukuk al-Ijara

The most commonly used sukuk structure is that of sukuk al-ijara. The popularity of this structure can be attributed to a number of different factors; some commentators have described it as the classical sukuk structure from which all other sukuk structures have developed, whilst others highlight its simplicity and its favour with Shari’a scholars as the key contributing factors.

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Sukuk al-Wakala

Sukuk al-wakala structure stems from the concept of a wakala which, literally translated, means an arrangement whereby one party entrusts another party to act on its behalf. A wakala is thereby akin to an agency arrangement. A principal (the investor) appoints an agent (wakeel) to invest funds provided by the principal into a pool of investments or assets and the wakeel lends it expertise and manages those investments on behalf of the principal for a particular duration, in order to generate an agreed upon profit return. The principal and wakeel enter into a wakala agreement, which will govern the appointment, scope of services and fees payable to the wakeel, if any. The relationship between the principal and the wakeel must comply with certain basic conditions, which are described below in “Key Features of Sukuk al-Wakala”.

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Sukuk al-Salam

Generally, in order for a sale to be valid under Shari’a the object forming the subject matter of the sale must be in existence and in the physical or constructive possession of the seller. The exceptions to this general position are sales effected pursuant to salam and istisna contracts.

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Sukuk al-Musharaka

Prior to the AAOIFI statement in 2008 (the “AAOIFI Statement”), one of the more commonly used sukuk structures was that of sukuk al-musharaka. However, following on from the AAOIFI Statement criticising the use of purchase undertakings in sukuk al-musharaka structures (as further discussed below under the heading “AAOIFI’s Statement of 2008”), the popularity of this structure has declined in recent times.

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Sukuk Al-Mudaraba

When structuring a sukuk issuance, the first step is often to analyse what exactly the business of an originator entails and what assets (if any) are available to support the issuance of sukuk. If at the outset, it is not possible to identify a specifc tangible asset for investment, the sukuk al-mudaraba (or a sukuk al-musharaka) may be a viable alternative to the sukuk al-ijara structure.

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Sukuk al-Murabaha

Although the sukuk al-murabaha structure is less commonly used in comparison to some of the other sukuk structures described in this Chapter 2 (Sukuk Structures), it could be considered as a possible alternative where it is not possible to identify a tangible asset for the purposes of the underlying investment.

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Sukuk al-Istisna

Alternatively referred to as the “Islamic project bond”, the structure of sukuk al-istisna has not been that widely used. Although, at first glance, the structure appears ideal for the financing of greenfield development, certain structural drawbacks have proven difficult to overcome and, as a result, sukuk al-istisna has not featured as an alternative source of Islamic funding on multi-sourced project financing in the manner once predicted.

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Sukuk al-Istithmar

As noted earlier in this Chapter 2 (Sukuk Structures), the first step in structuring a sukuk is often to analyse what exactly the business of an originator entails and what assets (if any) are available to support the issuance of sukuk. If it is not possible to identify a tangible asset and the business of such originator is largely ‘intangible’, then structuring a sukuk issuance can still be achieved (although not universally accepted).

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Other Sukuk Instruments

AAOIFI Shari’a Standard No.17 (Investment Sukuk), broadly define sukuk as certificates of equal value representing undivided shares in the ownership of tangible assets, usufructs and services, or in the ownership of the assets of particular projects or special investment activities. Sukuk can therefore be interposed on any underlying Shari’a-compliant structure. The previous parts of the Sukuk section focused on those structures that are frequently implemented in the Islamic finance market. The AAOIFI Shari’a Standard, however, list other types of sukuk in addition to those already discussed.

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