Short answer
Sukuk are Islamic investment certificates. Unlike a bond, which is a loan paying interest, a sukuk represents part ownership of real assets, a lease or a business, and its return comes from rent or profit. Properly structured sukuk are halal, but some sukuk have been criticised for guaranteeing investors their capital like a bond.
Sukuk are permitted when holders truly own shares in assets or a venture and bear its risk, and their return comes from rent or profit. Sukuk representing debts, such as murabaha receivables, may be traded only at face value. A promise by the issuer to buy back musharakah or mudarabah sukuk at face value, guaranteeing capital, is not permitted.
The four schools agree on this.
Explanation
A conventional bond is a loan: you lend the issuer $1,000 and receive fixed interest. That is riba. A sukuk (singular sakk) works differently. Holders own a share of something real, and they earn because they own it and carry its risk. The principle is "gain goes with liability".
Common types:
- Ijarah sukuk: holders own a building, aircraft or other asset that is leased out, and receive the rent. These can be traded at market price.
- Musharakah and mudarabah sukuk: holders are partners in a project and share its profit.
- Murabaha sukuk: represent a debt from a sale, so they cannot be traded except at face value.
- Wakalah sukuk: an agent invests the funds in a pool of halal assets for a fee.
The controversy: in 2007, Mufti Taqi Usmani, then chairing AAOIFI's Shariah board, criticised many sukuk in which the issuer promised to buy back the assets at face value whatever their worth, so investors' capital was in effect guaranteed like a bond. AAOIFI issued guidance in 2008 to correct this. Sukuk that do not truly transfer ownership, or that guarantee capital, are not acceptable.
For individual investors, sukuk funds and ETFs are a halal alternative to bond funds in a retirement account, if they are certified by a credible Shariah board. See Is a Roth IRA halal?, What is ijarah? and Are Islamic banks really halal? This entry explains principles and does not approve any particular issue.
The evidence
Quran, Surah Al-Baqara 2:275
ٱلَّذِينَ يَأْكُلُونَ ٱلرِّبَوٰا۟ لَا يَقُومُونَ إِلَّا كَمَا يَقُومُ ٱلَّذِى يَتَخَبَّطُهُ ٱلشَّيْطَٰنُ مِنَ ٱلْمَسِّ ۚ ذَٰلِكَ بِأَنَّهُمْ قَالُوٓا۟ إِنَّمَا ٱلْبَيْعُ مِثْلُ ٱلرِّبَوٰا۟ ۗ وَأَحَلَّ ٱللَّهُ ٱلْبَيْعَ وَحَرَّمَ ٱلرِّبَوٰا۟ ۚ فَمَن جَآءَهُۥ مَوْعِظَةٌۭ مِّن رَّبِّهِۦ فَٱنتَهَىٰ فَلَهُۥ مَا سَلَفَ وَأَمْرُهُۥٓ إِلَى ٱللَّهِ ۖ وَمَنْ عَادَ فَأُو۟لَٰٓئِكَ أَصْحَٰبُ ٱلنَّارِ ۖ هُمْ فِيهَا خَٰلِدُونَ ﴿٢٧٥﴾
Those who consume interest cannot stand [on the Day of Resurrection] except as one stands who is being beaten by Satan into insanity. That is because they say, "Trade is [just] like interest." But Allah has permitted trade and has forbidden interest. So whoever has received an admonition from his Lord and desists may have what is past, and his affair rests with Allah. But whoever returns to [dealing in interest or usury] - those are the companions of the Fire; they will abide eternally therein.
Sukuk earn from trade and rent; bonds earn interest.
Jami' at-Tirmidhi 1285
Grading to be checked... قضى أن الخراج بالضمان ...
"He ruled that gain goes with liability."
Sukuk holders earn because they own the assets and bear their risk.
Jami' at-Tirmidhi 1234
Graded hasan sahih... ولا ربح ما لم يضمن ...
"Nor profit on what is not in your liability."
A return with no ownership risk is not lawful profit.
Where the ruling is recorded
- AAOIFI Shari'ah Standards, Standard on investment sukuk. Types of sukuk and rules on trading and guarantees.
- Mufti Taqi Usmani, An Introduction to Islamic Finance, Chapter on Islamic investment instruments. Difference between sukuk and bonds.
- al-Hidaya, Kitab al-Ijarat and Kitab al-Shirka. The classical contracts behind ijarah and musharakah sukuk.
This answer is pending review by the scholars on our team. Quran translation by Sahih International. Hadith Arabic from the standard editions of the six books and the Muwatta, with gradings as recorded there; the English is our own rendering. Spotted a mistake? Tell us.