Translation: Sukuk = Sukuk

Definition:
Sukuk are securities of equal value that comply with Islamic Sharia provisions. They represent an undivided interest in assets, usufructs, or projects, and their holders are entitled to returns according to the terms of issuance.

Simple definition:
They are a way to finance a project or activity by raising funds from investors. In return for their contribution, each investor receives a sukuk representing an interest in an asset, usufruct, or project, and benefits from the returns generated by it according to the terms of issuance.

Note:
Sukuk do not mean that the investor has lent the issuing entity an amount in exchange for interest. Rather, they are based on a Sharia-compliant structure, such as being linked to an asset, usufruct, or project. The return structure varies according to the type and structure of the sukuk. Nevertheless, in most corporate sukuk, the issuing entity is committed to repaying the principal and returns. Therefore, they are recorded among its liabilities, and their risk is linked to the issuer's creditworthiness.

Example:
Suppose a company needs SAR 500 million in financing to expand an existing project, so it issues sukuk worth SAR 500 million to investors. The investors participate in the subscription, and the company receives the financing. In return, sukuk holders receive periodic returns according to the sukuk's structure and terms, and then redeem their value on the maturity date.

What does this mean for you?

  • Diversifying financing sources: Sukuk enable companies and entities to obtain financing from investors without relying solely on traditional bank loans.
  • Investment opportunities: They enable investors to participate in financial instruments linked to assets or projects through a Sharia-compliant structure.
  • Reading financial statements: When a company issues sukuk, its liabilities and financing costs increase, as with any borrowing. Therefore, evaluating the issuance depends on the company's ability to repay from its cash flows.

Difference between sukuk and bonds:

Comparison criterion Sukuk Bonds
Nature of the instrument Profit or rental income generated by the asset or contract, often fixed or linked to SIBOR Interest (coupon) on the debt amount
Underlying asset An asset, usufruct, or project is required Not required
Use of funds For a Sharia-compliant activity For any lawful purpose
Sharia oversight Approval by a Sharia board is required Not required
Trading Depends on the type of sukuk; some debt-based sukuk may only be traded at their face value Traded at the market price
Investor risk Generally the issuer's credit risk, as with a bond Issuer's credit risk
Issuer's accounting treatment Generally recorded among liabilities Recorded among liabilities

Frequently asked question:
Are sukuk like bonds?

Answer: Both can be a means of obtaining financing, but sukuk differ from bonds in their structure. Sukuk are based on assets, usufructs, or projects and have a Sharia-compliant structure, whereas a bond typically represents debt owed by the issuing entity. Economically, many sukuk are similar to bonds in terms of periodic returns and repayment of principal at maturity.