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Sukuk are Islamic bonds that are structured in a way to generate returns to investors without any transaction involving riba (usury). By defnition, Sukuk are shares in the ownership of tangible assets, with reference to a particular project or an investment activity. Conventional bonds require the investor to pay the bond holder the amount owed, along with interest, on a specifed date. In the case of Sukuk, the element of debt is non-existent, and bond holders share the benefcial ownership of the asset or the project that the bonds represent. Due to this, Sukuk holders are entitled to the revenues generated by the sukuk assets, and sale of sukuk is necessarily the sale of a share in the ownership of the asset. Sukuk are generally issued to raise long-term fnance for a particular project. They have become widespread and have reached an investment of over $1.34 trillion, according to the Global Islamic Finance Report 2012.

A few years ago, there was a controversy on whether all the sukuk in the Islamic Financial market were Islamic. Mufti Muhammad Taqi Usmani, President of the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI), Bahrain, said in 2008 that over 80 per cent of the sukuk that were being traded were un-Islamic for the fact that they were being considered for investment in currency, giving a way to bring in the concept of time value of money in the investments – which is invalid in Islamic fnance. In addition, there was another reason: many sukuk were traded with a promise to repurchase on a future date at the face value of the bond. Such a transaction is similar to the conventional fnancial product, futures, which is unIslamic due to the existence of the guaranteed return, regardless of proft or loss. For an investment product to meet Islamic fnancial standards, the owners should share the risk and the proft under all circumstances. The AAOIFI has suggested that it will be applying stricter rules for approving sukuk issuance for companies. These rules include conditions that suggest that sukuk must represent ownership shares in assets or commercial or industrial enterprises that would bring revenues or profts; payment to the sukuk holders should be a share of the net profts generated; and the value payable to the sukuk holder on maturity should be the current market value of the asset or project and not the value at the time of investment. Sukuk can either take the form of Murabahah, Musharakah, Ijarah (asset), Istithna (project) or Istithmar (onvestment). This will form our topic for the next issue.

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