The Role of Sukuk in Islamic Capital Markets
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2. DEVELOPING A SUKUK MARKET: KEY BUILDING BLOCKS
2.1 SUKUK AS AN ISLAMIC FINANCIAL INSTRUMENT
The idea of finding a Shariah-compliant alternative to interest-bearing bonds, with features
and benefits similar to bonds, had led to the contemporary development of sukuk as an Islamic
financial instrument. Islamic financial institutions had needed a Shariah-compliant tool that
could be structured as a short-term instrument, to manage their excess liquidity. They also
needed a Shariah-compliant instrument to raise medium- to long-term large-scale financing.
Corporations and governments alike had sought a non-interest-based financing vehicle to raise
funding for infrastructure projects, real estate development, asset acquisition, business
expansion and other socio-economic projects. The early sukuk issuances had thus mimicked
the features of fixed-income securities, providing regular returns to investors throughout the
maturity period and repaying the capital upon redemption. The sukuk issuances had been
backed by revenue from specific projects, instead of generating returns. Sukuk can also be
issued in various denominations, currencies and tenures. Similar to conventional securities,
they can be structured to target different types of investors, be rated and listed, be traded on
the secondary market, be restructured and rescheduled, and be secured against different types
of assets. All said Shariah compliance is vital in sukuk structuring, issuance and trading.
2.1.1 EVOLUTION OF SUKUK AS AN ISLAMIC FINANCIAL INSTRUMENT
The evolution of sukuk can be traced back from its classical use to its development in
contemporary times. Early utilization of the term “sukuk” in classical literature can be traced
back to the 1 st Century AH, during the Umayyad Caliphate under the rule of Caliph Marwan ibn
al-Hakam. A narration quoted in al-Muwattaʾ of Imam Malik ( hadith no. 44) refers to sukuk as a
certificate - more specifically, commodity or grain coupons - entitling its holders to the receipt
of commodities/grains when the sukuk matured. The holders of these certificates used to sell
the sukuk for cash before taking delivery of the commodities/grains upon maturity. This
practice had led to the sale of the underlying assets that the sukuk represented before the
holders took ownership of the commodities/grains. It was thus disapproved by scholars at the
time.
According to Çizakça (2011), the Ottoman Empire (1299–1923) had been issuing similar
financial certificates, known as esham, to finance public debt since 1775. These certificates had,
as underlying assets, the right to collect taxes (a form of financial right); the tax revenue due to
the state had been securitized to raise financing.
In more recent times, the International Islamic Fiqh Academy of the Organisation of Islamic
Cooperation (IFA-OIC) discussed the issue of muqaradah bonds in 1986 and 1988. The
deliberations established the conditions of issuing muqaradah certificates and thus legitimized
the concept of sukuk. The idea approved was that of a muqaradah sukuk (a term used by the
Maliki and Shafi’i schools of thought, which is similar to the term mudarabah sukuk), where
the sukuk certificates represented:
... evidence of capital ownership, on the basis of shares of equal value,
registered in the names of their owners, as joint owners of shares in the
venture capital or whatever shape it may take in proportion to each one’s
share therein (IFA-OIC, Resolution No. 30 (5/4), 1988).