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. A summary of each these structures is set out below.

1. Sukuk al-Manfa’a
   The sukuk al-manfa’a structure envisages the grant to the Trustee of a long-term right to use an asset. This grant can take a number of forms depending on the nature of the asset involved but can include, for example, a head lease to the Trustee or an assignment or sale of certain rights in an asset to the Trustee. The Trustee, as owner of those rights to use, can apply those rights to use in order to generate returns for the Investors. The method in which the rights to use are applied can vary depending on the nature of the asset involved and the rights to use granted to the Trustee, but can include, for example, a sublease of the rights to use back to the Originator or appointing a distributor for the purposes of distributing the rights to generate returns for the Investors. Alternatively, the rights granted to the Trustee may already be generating returns and, as owner of those rights, the Trustee is entitled to receive those returns on behalf of the Investors.
2. Sukuk al-Muzara’a
   A muzara’a contract is used in relation to sharecropping. Under a sukuk al- muzara’a arrangement the Originator would typically be an owner of land or of the usufruct of that land and the subscribers would typically be farmers (or other cultivators) who assume the obligation of cultivating the land on the basis of a muzara’a contract. The farmers would cultivate the land and the proceeds of the issuance would represent the costs of the cultivation. Alternatively, the Originator can be the farmer that requires land and therefore issues sukuk al-muzara’a certificates to Investors. The proceeds of the issuance are then used to acquire the land for the purposes of cultivating it. In both situations, the holders of the sukuk are entitled to a share of the crop produced as a result of the cultivation. Where the Investors are the farmers, the sukuk can only be traded after the crop has been produced. However, where the Investors are the owners of the land, the sukuk can be traded once the sukuk have been issued and the activity on the land commences.
3. Sukuk al-Musaqa
   A musaqa contract is similar to a muzara’a contract except that it is used in relation to irrigating fruit- bearing trees and spending and caring for them. Under a sukuk al-musaqa arrangement the Originator would typically be an owner of land that consists of trees or of the usufruct of that land and the subscribers would typically be workers (i.e., irrigators) who assume the obligation of irrigating the land pursuant to a musaqa contract. The irrigators would irrigate the trees and spend and care for them and the proceeds of the issuance would represent the costs of the irrigation and upkeep. Alternatively, the Originator can be the irrigator and the subscribers to the sukuk can be the owners of the land. The proceeds of the issuance are then used to finance the irrigation of the land. In both situations, the holders of the sukuk are entitled to a share of the produce of the trees. Where the Investors are the irrigators, the sukuk can only be traded after the produce of the trees has matured. However, where the Investors are the owners of the land, the sukuk can be traded once the sukuk have been issued and the activity on the land commences.
4. Sukuk al-Mugharasa
   A mugharasa contract is used for planting trees and undertaking the work and expenses required by such plantation. Under a sukuk al-mugharasa arrangement the Originator would typically be an owner of land suitable for planting trees and the subscribers would typically be workers (i.e. planters) who assume the obligation of planting trees on the basis of a mugharasa contract. The planters would plant and maintain the trees and the proceeds of the issuance would represent the costs of maintaining the plantation. Alternatively, the Originator can be the planter and the subscribers to the sukuk can be the owners of the land. The proceeds of the issuance are then used to finance the plantation on the land. In both situations, the holders of the sukuk are entitled to a share in both the trees and the land. Sukuk al-mugharasa certificates can be traded after closing of subscription and once activity on the land commences (irrespective of whether the holders of the sukuk are planters or owners of the land).

This article was originally published in the Dubai International Financial Centre Sukuk Guidebook. The article is reproduced on this website with the kind permission of the Dubai International Financial Centre (DIFC).