Sukuk an investment by sukuk holder in business

Sukuk is a
financial certificate or an Islamic bond. It is not a fixed income, and not
interest-bearing bonds Sukuk are securities that suits with Shariah compliant
which prohibited riba. Sukuk are frequently portrayed as one of the most
promising instruments in Islamic finance. There are two categories of Sukuk
which are Debt Sukuk and Equity Sukuk.

The principal
differences between a Debt Sukuk and an Equity Sukuk are as follows:

We Will Write a Custom Essay Specifically
For You For Only $13.90/page!


order now

 

No

Criteria

Debt Sukuk

Equity Sukuk

1.

Islamic
financing concept applied

Murabahh,
Bai’ Bithaman Ajil, Al-Istisna, Al-Ijarah, Al-Salam, Al-Tawarruq, Al-Inah

Musyarakah
dan Mudharabah

2.
 

Relationship
between issuer and sukuk holder

Issuer owes a
debt of Rental Notes to the sukuk holder (financier) after the transaction.

An investment
by sukuk holder in business of issuer. Not a debt owed by issuer.
Sukuk holder
is part of the issuer’s business.

3.

Payment
received by sukuk holder

Received
fixed sum of money periodically from Issuer.

No fixed
payment from issuer. Sukuk holder gain a profit return on a company
Business.

4.

Sukuk
holder’s ownership

Beneficial
ownership with no right to dispose of underlying assets.

The issuer
and sukuk holder have a right and obligation on the underlying asset or
investment at a pre-agreed profit and loss sharing ratio during the contract
initiated. If Mudharabah concept is apply, the sukuk holder are the capital
provider and the issuer is the entrepreneur. If Musyarakah concept is apply,
then the sukuk holder and issuer are partner in the particular business.

 5.

Cost involved

Issue Debt
Sukuk is simple and involve low cost.

Issue Sukuk Equity
is more complex and need to use third party services such as lawyers and
accountants. It is an equity investment. Therefore, the cost is higher.

6.

The purpose
of money release

Monies
released is not investment in business of issuer. It is payment for Purchase
Price.

Monies
released is an investment by sukuk holder in business of issuer.

7.

Distribution
of profit

Issuer does
not distribute profits of business to financier

Issuer
covenants to pay profits to financier based on agreed profit sharing ratio.

8.

Shari’ah
compliant
requirement

The asset
which sukuk is based on should be shari’ah compliant.

Shari’ah
compliant might be applied on the issuer’s business.

9.

Risk

Consider no
any risk need to bear due to the sukuk holder will receive a fixed sum of
money periodically from issuer. This sukuk also fits easily with trading
system and regulation; and easy to price in secondary trading.

There is a
risk must bear by sukuk holder when will not receive the expected return in the
case the underlying asset do not perform.
Moreover, the
sukuk holder also will bear the risk of depreciation of the underlying asset.
This may affect their principal amount when they sell the share back to the originator
at maturity.