Sukuk in the Collateral Pyramid

Sukuk as Collateral Security
For institutional investors and banks, sukuk can be used as collateral for obtaining financing. Understanding the collateral qualities of sukuk is critically important for treasury and collateral management.

Collateral Quality Pyramid

Sukuk Tier	Category	LTV	Haircut	Examples
Tier 1	Sovereign AAA-A	85-95%	5-15%	Saudi Arabia, UAE Sukuk
Tier 2	Quasi-sovereign / Supranational	80-90%	10-20%	IDB, Mubadala, ADNOC
Tier 3	Financial IG	75-85%	15-25%	Dubai Islamic Bank, Al Rajhi
Tier 4	Corporate IG	70-80%	20-30%	Emaar, DP World
Tier 5	High Yield / Unrated	50-70%	30-50%	Small corporates

Factors Influencing Collateral Quality

Credit rating — main driver
Liquidity — possibility of quick sale
Underlying asset — quality of underlying asset
Time to maturity — shorter = lower haircut
Issuer — sovereigns are better than corporates
Structure — Ijara is preferable to Murabaha

Sukuk in Lombard Lending

Large private banks in GCC (Citi, HSBC, Deutsche) accept sukuk as collateral:

Bank	Acceptable Sukuk	Typical LTV
HSBC Private Bank	Sovereign + IG Corporate	70-85%
Citi Private Bank	Sovereign + Quasi-sov	75-90%
Julius Baer	Selective GCC sukuk	65-80%

Sukuk in Repo Operations

Some sukuk are accepted in repo:

IILM (International Islamic Liquidity Management) — short-term sukuk for interbank liquidity
Central Bank repos — UAE, Bahrain, Malaysia accept in central bank operations
Bilateral repos — between Islamic banks

Comparison with Conventional Bonds

Parameter	Sukuk	Conventional Bond
Acceptance in ECB repo	Limited	Broad
Acceptance in Fed repo	No	Yes (Treasuries)
GCC Central Banks	Yes	Yes
Private bank Lombard	Selective	Broad
Haircut premium	+5-10%	Base

Recommendations for CIO

Check eligibility — not all sukuk are accepted everywhere
Consider haircut premium — sukuk are usually more expensive as collateral
Diversify — do not concentrate on a single issuer
Monitor credit ratings — downgrade = review of LTV