Sukuk

A conventional bond is a loan: the issuer borrows money and promises to repay the principal plus interest on a fixed schedule, regardless of how the underlying business performs. That structure is riba, and riba is prohibited in Islamic finance. A sukuk avoids this by giving the investor an ownership stake in a real asset (a building, a fleet of aircraft, a toll road, a portfolio of trade contracts) rather than a claim on borrowed money. Sukuk holders earn a return because the underlying asset generates rent, profit, or trade income, and that return is passed through to them. If the asset's income falls, the sukuk holder's return can fall too, at least in principle. This profit-and-loss linkage, not a guaranteed coupon, is what makes sukuk fundamentally different from a bond even though both trade on public markets and both get priced, rated, and settled the same way.

Most sukuk are built around a special purpose vehicle (SPV) that holds title to a real asset on behalf of investors. Several contract types are common. An ijara sukuk works like a sale-and-leaseback: the SPV buys an asset from the issuer and leases it back, and investors collect rental payments. A murabaha sukuk is built around a cost-plus trade transaction, generating a fixed markup that resembles a bond coupon in cash flow but is legally structured as trade profit. A musharakah or mudarabah sukuk represents an equity-like stake in a joint venture, where returns move with the venture's actual profit. Each structure has to satisfy a Shariah board that the underlying asset is real, that ownership genuinely transfers to the SPV, and that returns are tied to that asset rather than to the passage of time on a loan.

Sukuk have grown from a niche instrument into a mainstream part of global Islamic finance. S&P Global put total sukuk issuance at roughly $264.8 billion in 2025, up from $234.9 billion in 2024, and outstanding global sukuk crossed the $1 trillion mark during 2025, concentrated heavily in the Gulf Cooperation Council and Southeast Asia. Governments (Saudi Arabia, Malaysia, Indonesia, the UAE) and corporations both issue sukuk to raise capital from Islamic and conventional investors alike, since sukuk are typically open to any buyer, not just Muslim ones. For a retail investor, direct sukuk purchases are uncommon; most exposure comes through dedicated sukuk funds or ETFs that pool many issues into a single diversified holding.

A properly structured sukuk should not generate impermissible income the way a conventional bond's interest does, because the return is framed as rent, trade profit, or a share of venture profit rather than interest on a loan. That said, not every instrument marketed as a "sukuk" is airtight. Some earlier sukuk structures were criticized by scholars, most notably in a widely cited 2007 assessment by AAOIFI's Sharia board, for guaranteeing principal repayment in a way that functionally resembled a loan. Reputable sukuk today are built to avoid that flaw, but investors should still confirm a fund's sukuk holdings are certified by a recognized Shariah board rather than assuming the label alone guarantees compliance.