Are You Interested In Investing In Sukuk or Islamic Bonds?
One form of investment in the rapidly growing Islamic Finance sector is sukuk, or Islamic bonds. Based on data from IFIS Moody’s July 2014 report, the largest sukuk issuers in the world are Malaysia (57%), United Arab Emirates (12%) and Saudi Arabia (11%). Sukuk is the capital market securities issued by companies or governments and has characteristics similar to bonds that provide regular returns to its investors to maturity. Sukuk is issued to finance tangible assets such as power plants, oil fields, or real estate, with the structure in accordance with the principles of Islam.
aMuslima has written about the comparisons between Islamic Sukuk and Conventional Bonds, now let’s see in brief the differences of both types :
- Conventional bonds are debt instruments that allow investors to buy and sell debt, while sukuk is based on tangible assets — such as property or businesses– which allow investors to buy and sell these assets.
- Bonds pay a fixed rate of returns as interest and sukuk pays a fixed rate of return as a percentage of profit sharing or rental payments on the asset.
For example, a telecommunications company issues sukuk, the ownership of its assets are then transferred to the owner of the sukuk. As co-owner of the company, sukuk holders are entitled to a share of the company’s profit to be paid at a certain percentage.
While in the case of project financing, which does not generate revenue such as public infrastructure projects, the government- issued sukuk transfers ownership of the project’s assets to sukuk holders, but to give in return, the government rents the assets from the sukuk holders while paying a certain percentage.
Therefore, the issuer does not transfer debt but rather tangible assets for both sukuk of revenue and non-revenue. Assets will be transferred back to the issuer if the sukuk has matured, while the investment funds are returned to the investors. The return paid from sukuk is permissible under Islamic law because it is considered profit-sharing, not interest.
For investors, the benefits of buying sukuk are:
- Sukuk provides income in the form of reward or profit sharing, investors’ returns are generally higher from the average interest rate on bank deposits (i.e. fixed annual returns of 3 to 8% and more on US dollar denominated bonds).
- Sukuk can be traded in the secondary market according to the market price, so that potential investors get a capital gain on the secondary market from the difference between the sales price and the purchase.
- It is a safe investment, as the return payments and the nominal value are guaranteed by the Act.
- Investments are reassuring, since it does not conflict with Sharia principles such as riba (usury), gharar (uncertainty), maysir (gambling), alcohol, tobacco, narcotics, and adult entertainment products and services.
If you are interested in investing your funds through sukuk, how can you buy it?
- The government or companies that need financing for a project will offer sukuk to prospective investors, with consideration and arrangement of a fixed percentage per year for the sukuk buyer. The maturity date is determined, and the investor will receive the reward per month until maturity.
- If interested, prospective investors can seek appointed selling agents, consisting of banks and securities.
- Prospective investors are required to bring identification, to fill out a form disclosing the order/reservation of sukuk (there are minimum and maximum amount).
- After the offer period ends, the agency will continue the booking process to the relevant institutions. There is a possibility that investors will receive ration orders less than the amount subscribed to if many investors are interested.
- If the investor has received assurance of the amount of funds to be invested in sukuk, depositing funds can be done through the investor’s account.
Investors do not have to keep this sukuk until maturity but they can buy and sell in the secondary market at the time they need their funds. The mechanism of buying and selling can be done on the stock exchange, with conveyed interest in buying or selling to the local Stock Exchange. If there is a price match between investors sellers and investors buyers, the transaction can be completed through the exchange mechanism. Furthermore, the securities designated company will complete the sukuk trading transactions.
If you are looking for halal investments with high rewards, based on tangible assets and not intangible debt, sukuk is the best choice.