Sukuk: Structures, Markets, and Ratings

Sukuk is the Islamic analogue of bonds. Unlike a standard bond, sukuk represents a share of participation in a real asset, service, or project rather than a debt note with interest. The sukuk market exceeded $800 billion outstanding by 2023.

Key Sukuk Structures

Sukuk al-Ijara (Lease)

The most common structure (60–70% of the market).

Mechanics:

1. The issuer sells an asset (real estate, airplanes, equipment) to a Special Purpose Vehicle (SPV)
2. The SPV issues sukuk holders (certificates of participation in the asset)
3. The proceeds are used to purchase the asset from the issuer
4. The SPV leases the asset back to the issuer (ijara — leasing)
5. Lease payments are distributed among sukuk holders (≈ "coupon")
6. At maturity, the issuer buys the asset back from the SPV at an agreed price (≈ "principal redemption")

Why it works: Sukuk holders effectively own shares in a real asset and receive income from its leasing — not interest.

Sukuk al-Murabaha (Cost-Plus Sale)

2. The issuer instructs the SPV/agent to buy a commodity at market price
3. The SPV resells the commodity to the issuer at a markup on installment (murabaha — cost-plus financing)
4. Installment payments → sukuk holders

Limitation: Murabaha sukuk cannot be traded on the secondary market (debt!), only sold at face value. This limits liquidity.

Sukuk al-Musharakah / Mudarabah

Sukuk based on the principle of profit and loss sharing. Holders actually participate in PLS structure.

More "pure" from the Shariah perspective, but less popular due to complexity and income uncertainty.

Sukuk al-Wakala (Agency)

The SPV appoints the issuer as its agent (wakeel) for investing in a diversified portfolio of assets. Flexible structure enabling the creation of sukuk on broad portfolios.

Hybrid Sukuk

An asset portfolio from various structures (e.g., 51% ijara + 49% murabaha). Allows secondary market trading (if the ijara share is >50%).

Sukuk Market

Leading issuing jurisdictions:

• Malaysia (~40% of the market) — most developed market
• Saudi Arabia (~15%)
• UAE (~10%)
• Kuwait, Qatar, Bahrain
• International: Turkey, Pakistan, Indonesia, UK (sovereign sukuk), Luxembourg

Key issuers:

• Sovereigns: Saudi Arabia (Vision 2030 sukuk), UAE, Malaysia
• Corporations: Saudi Aramco, DP World, Emirates Airlines, ADNOC
• International organizations: Islamic Development Bank (IsDB), IFC (green sukuk)

Primary issuance market volume: ~$150–200 billion/year

Sukuk Ratings

Standard agencies (Moody's, S&P, Fitch) rate sukuk. The rating reflects the credit quality of the issuer/originator, not the Shariah structure.

Assessment specifics:

• In default: can holders exercise recourse over real assets? Legal structure differs across jurisdictions.
• "Asset-backed" vs "Asset-based": genuine sukuk should be asset-backed (holders can claim the asset). Most corporate sukuk are only asset-based (issuer's obligation to repurchase).

Yield and Sukuk Greenium

Sukuk trade at a slight premium to conventional bonds of the same issuer (~5–15 bps) due to structural costs. However, green sukuk may trade with a greenium (like green bonds) — e.g., DP World Green Sukuk.

For CIO: Practical Considerations

• Liquidity: The secondary sukuk market is less liquid than the conventional bond market
• Jurisdictional risk: Enforcement in default depends on local law (Islamic law vs. English law)
• Shariah compliance: AAOIFI vs. IFSB standards → some sukuk are recognized by certain scholars and not others
• Diversification: Including sukuk in a portfolio gives access to GCC sovereign credit with good risk/return