sukuk

Sukuk (; plural of ) is the Arabic name for financial certificates, also commonly referred to as "sharia compliant" bonds. Sukuk are defined by the AAOIFI (Accounting and Auditing Organization for Islamic Financial Institutions) as "securities of equal denomination representing individual ownership interests in a portfolio of eligible existing or future assets." The Fiqh academy of the OIC legitimized the use of sukuk in February 1988.

Sukuk were developed as an alternative to conventional bonds, which are not permissible in Islam as they pay interest (prohibited or discouraged as Riba, or usury), and also may finance businesses involved in activities not permitted under sharia (gambling, alcohol, pork, etc.). Sukuk securities are structured to comply with sharia by paying profit, not interest—generally by involving a tangible asset in the investment. For example, sukuk securities may have partial ownership of a property built by the investment company (and held in a Special Purpose Vehicle), so that sukuk holders can collect the property's profit as rent (which is allowed under Islamic law). Because they represent ownership of real assets and (at least in theory) do not guarantee repayment of initial investment, sukuk resemble equity instruments, but like a bond (and unlike equity) regular payments cease upon their expiration. However, most sukuk are "asset-based" rather than "asset-backed"—their assets are not truly owned by their Special Purpose Vehicle, and their holders have recourse to the originator if there is a shortfall in payments.