Short answer: Sukuk (singular sakk, صَكّ, "certificate") are investment certificates that give their holders a share in the ownership of a real asset, a lease or a business venture. The holders earn from the rent or profit that asset produces. A conventional bond is a loan that earns interest, which is riba. Sukuk built on real ownership and real risk are permitted in the Hanafi school and the other three. The serious concern is sukuk that guarantee the investors' money back at face value, which makes them a bond under another name. Mufti Taqi Usmani raised this in 2007, and AAOIFI issued corrective guidance in 2008.
What sukuk are
The word sakk is old. In the time of the Umayyad governor Marwan, people were paid their food rations with written certificates called sukuk, and some sold them on before they had received the food. Abu Hurayrah objected, because the Prophet ﷺ forbade selling food before taking possession of it, and Marwan stopped the trade (Sahih Muslim 1528). The modern sukuk market began in the early 2000s, mostly in Malaysia and the Gulf, and today governments, banks and companies use sukuk to raise money for buildings, aircraft, roads and businesses.
The standard used by most Islamic banks is Shari'ah Standard No. 17, Investment Sukuk, from AAOIFI (the Accounting and Auditing Organization for Islamic Financial Institutions, based in Bahrain). It defines sukuk as certificates of equal value that represent undivided shares in the ownership of tangible assets, their use (usufruct) or services, or the assets of a particular project or investment activity. The key word is ownership.
Sukuk and bonds compared
| Conventional bond | Sukuk | |
|---|---|---|
| What you hold | A loan to the issuer | A share in an asset, a lease or a venture |
| Your return | Interest, set by time and amount lent | Rent or profit the asset actually earns |
| What you carry | The issuer's credit risk | The risk of owning the asset, plus the issuer's |
| Assets needed | None | Real, identifiable assets or a real business |
| Use of the money | Anything | Only halal activities |
| Selling it on | At any price | Depends on the type (see below) |
The difference is not a label. Allah "has permitted trade and has forbidden interest" (2:275), and the Prophet ﷺ gave the rule that separates a halal return from riba:
الْخَرَاجُ بِالضَّمَانِ
Al-kharāju biḍ-ḍamān
"Gain goes with liability": whoever carries the risk of a thing is the one entitled to what it earns.
Sunan Abi Dawud 3508 and Jami at-Tirmidhi 1285, from Aishah; at-Tirmidhi graded it hasan sahih
A lender who carries no risk of the asset and still takes a fixed increase is taking riba. An owner who carries the risk of the asset may take the rent or profit it produces.
How a sukuk works: an example
Here is the most common kind, an ijarah (lease) sukuk, with round numbers chosen only to make the steps clear:
- A government needs 100 million dollars. It sells some of its buildings, worth that amount, to a special company set up only to hold them.
- That company issues 100,000 certificates of 1,000 dollars each. Investors buy them, and the money pays for the buildings. Each certificate is now a share in the buildings.
- The company leases the buildings back to the government for five years. The rent is passed to the certificate holders, usually twice a year.
- At the end, the government buys the buildings back and the holders receive the sale price.
Step 4 is where scholars look hardest. If the buy-back price is fixed at the full original amount whatever happens, and the holders cannot lose, the structure starts to look like a loan.
The main types of sukuk
| Type | What the holders own | Can it be sold on? |
|---|---|---|
| Ijarah (lease) | An asset leased out; they earn the rent | Yes, at any agreed price |
| Musharakah (partnership) | A share in a joint venture; they earn its profit | Yes, while it holds mostly real assets |
| Mudarabah | Capital managed by an expert partner; profit is shared | Yes, while it holds mostly real assets |
| Wakalah (agency) | A pool of halal assets run by an agent for a fee | Yes, while it holds mostly real assets |
| Murabaha | A debt from a sale on credit | Only at face value |
| Salam and istisna | Goods to be delivered or built later | Restricted until delivery |
The last two rows matter. A murabaha sukuk is a debt, and selling a debt for more or less than its face value is riba. So it can be held to maturity, but not traded at a market price. See What is ijarah?, What is musharakah?, What is mudarabah? and What is murabaha?
The Hanafi and Deobandi position
Sukuk are permitted when the holders truly own undivided shares in assets, a lease or a venture, carry the risk of that ownership, and earn rent or profit from it. Sukuk that stand for a debt may change hands only at face value. A promise by the manager, partner or agent to buy back musharakah, mudarabah or wakalah sukuk at their face value, so that the investors' capital is guaranteed, is not permitted.
Other madhhabs
- Shafi'i, Maliki and Hanbali
- The same principles. AAOIFI's Shari'ah board, whose standards these are, includes scholars from all four schools. Some Malaysian scholars once allowed debt-based sukuk to be sold at a discount, relying on a Shafi'i view on selling debts; AAOIFI and most scholars elsewhere reject this.
The leading Hanafi voice in this field is Mufti Muhammad Taqi Usmani of Darul Uloom Karachi, a Deobandi scholar who chaired AAOIFI's Shari'ah board. His book An Introduction to Islamic Finance sets out the rules for ijarah, murabaha and musharakah that most sukuk use. Not every Deobandi scholar agrees with how Islamic banks apply those rules: in 2008 a group of Deobandi muftis in Pakistan published a critique of Islamic banking as practised, and Mufti Taqi Usmani replied in detail. Both sides agree on the principles above. Where they differ is on whether particular products really follow them.
The 2007 debate
In 2007 Mufti Taqi Usmani, then chairman of AAOIFI's Shari'ah board, published a paper on sukuk and their contemporary applications. He wrote that most sukuk then on the market, especially musharakah and mudarabah sukuk, promised investors their capital back at face value and paid a return pegged to an interest rate, with the shortfall topped up by the manager. In effect they behaved like bonds.
In February 2008 AAOIFI's Shari'ah board issued a resolution in response. Its main points:
- Sukuk must represent real ownership of the assets, with all the rights and duties of ownership, recorded properly.
- A manager, partner or agent may not promise to lend money to the holders when profits fall short.
- They may not promise to buy the assets back at face value. They may buy them back at market value, net asset value, or a price agreed at the time of the purchase.
- In an ijarah sukuk, the lessee may promise to buy the asset at its face value at the end, as long as it is not also a partner or manager of the sukuk.
- Shari'ah boards must check how the sukuk is actually run, not only approve its documents.
What makes a sukuk halal or not
- Real assets and real ownership. Most sukuk sold today are "asset-based": holders have a beneficial interest in the assets, and if the issuer defaults they often end up as its creditors. Shari'ah boards accept this when there is a true sale and the holders carry the risk of ownership. "Asset-backed" sukuk, where holders can take the assets, are closer to the ideal.
- A halal business. The money may not fund a conventional bank, alcohol, gambling or the like.
- No guaranteed capital. No partner or manager may promise the face value back.
- Return from the asset. Rent may be fixed, or linked to a benchmark such as an interest rate. That is a way of setting the rent, and Mufti Taqi Usmani allows it, as long as the holders own the asset and its risk.
- The right trading rules for its type, as in the table above.
- A named Shari'ah board whose pronouncement (fatwa) on the issue is published.
If you want to invest in sukuk
Most individuals hold sukuk through a sukuk fund or exchange-traded fund, or through an Islamic bank's investment account, rather than buying single certificates. We do not recommend products. Read the fund's Shari'ah board statement, check what it holds, and ask a mufti you trust if something is unclear. For a retirement account, see Is a Roth IRA halal?, and for the wider picture, Are Islamic banks really halal? and What is riba?
Sukuk you hold are part of your zakatable wealth. The simple and cautious way many muftis give is to pay 2.5% of their market value on your zakat date, as with other investments, and to add them in the zakat calculator.
FAQ
Are sukuk halal?
Sukuk that give holders real ownership of halal assets, with the risk that comes with it, are halal in all four schools. Sukuk that guarantee capital at face value, or that are debts traded at a discount, are not.
Are sukuk the same as bonds?
No. A bond is a loan that earns interest. A sukuk is a share in an asset, a lease or a venture that earns rent or profit, and its holders carry the risk of owning it.
Is the profit on sukuk interest?
Not when the sukuk is sound. The return is rent or profit from an asset the holders own. Linking rent to an interest benchmark sets the price; it does not turn rent into interest.
Can I sell sukuk before they mature?
Ijarah, musharakah, mudarabah and wakalah sukuk can be sold at market price while they hold mainly real assets. Murabaha sukuk are debts and may change hands only at face value.
What is AAOIFI?
The Accounting and Auditing Organization for Islamic Financial Institutions, in Bahrain. Its Shari'ah standards, including No. 17 on investment sukuk, are used by Islamic banks around the world.
Sources
- Quran 2:275, Arabic from the Uthmani text, translation by Sahih International.
- Sahih Muslim 1528, from Abu Hurayrah (the food certificates, sukuk, in Marwan's time).
- Sunan Abi Dawud 3508 and Jami at-Tirmidhi 1285, from Aishah: "gain goes with liability".
- AAOIFI, Shari'ah Standard No. 17: Investment Sukuk, and the AAOIFI Shari'ah board's resolution on sukuk, February 2008.
- Muhammad Taqi Usmani, Sukuk and their Contemporary Applications (2007), and An Introduction to Islamic Finance.
- On the Hanafi rules of debt and partnership: al-Marghinani, al-Hidayah, and Ibn Abidin, Radd al-Muhtar.
The rulings on this page are pending review by the scholars on our team.