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Sukuk in general may be understood as a shariah
compliant ?Bond?. In its simplest form sukuk represents ownership of an
asset or its usufruct. The claim embodied in sukuk is not simply a claim to
cash flow but an ownership claim. This also differentiates sukuk from
conventional bonds as the latter proceed over interest bearing securities,
whereas sukuk are basically investment certificates consisting of ownership
claims in a pool of assets. Sukuk (plural of word sak) were extensively used
by Muslims in the Middle Ages as papers representing financial obligations
originating from trade and other commercial activities. However, the present
structure of sukuk are different from the sukuk originally used and are akin
to the conventional concept of securitization, a process in which ownership
of the underlying assets is transferred to a large number of investors
through certificates representing proportionate value of the relevant
assets.
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Beginning modestly in 2000 with total three
sukuk worth $336 millions the total number sukuk by the end of 2006 has
reached to 77 with over US$ 27 billion funds under management. By the end of
2007 the total figure is expected to exceed US$35 billion.
Sukuk has developed as one of the most significant mechanisms for raising
finance in the international capital markets through Islamically acceptable
structures. Multinational corporations, sovereign bodies, state corporations
and financial institutions use international sukuk issuance as an
alternative to syndicated financing.
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Sukuk and Bond
A bond is a contractual debt obligation whereby the issuer is contractually
obliged to pay to bondholders, on certain specified dates, interest and
principal, whereas, the sukuk holders claims an undivided beneficial
ownership in the underlying assets. Consequently, sukuk holders are entitled
to share in the revenues generated by the sukuk assets as well as being
entitled to share in the proceeds of the realization of the sukuk assets.
A distinguishing feature of a sukuk is that in instances where the
certificate represents a debt to the holder, the certificate will not be
tradable on the secondary market and instead is held until maturity or sold
at par. Accounting and Auditing Organisation for Islamic Financial
Institutions (AAOIFI) defines sukuk as being:
?Certificates of equal value representing after closing subscription,
receipt of the value of the certificates and putting it to use as planned,
common title to shares and rights in tangible assets, usufructs and
services, or equity of a given project or equity of a special investment
activity?.
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