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Types of Sukuk and Islamic Securities

Prof. Dr. Monzer Kahf
22 August, 2026

Sukuk and Islamic Securities

Although securitization means transforming assets into financial assets that can be subscribed to in an exchange market, it began by representing assets in tradable documents. The classical Shariah literature cites innumerable instances where such documentation and exchange take place. To begin with, the Qur’an itself mentions documentation of debts in a written form. Documentation is a representation of ownership or entitlement.[1]

Accordingly, assets that can be securitized include physical properties (whether fixed assets or merchandise inventory), intangible rights (such as publication or patent rights), usufructs, and debts (both monetary and in kind). Of course, money may also be included. From the Shariah point of view, principles that govern tradability and negotiability of securities are those that relate to sale (bay`), money exchange (Sarf), and transfer (Hawalah).[2]

Shariah, like other legal systems, permits the sale of fixed assets, goods in inventory, rights, usufructs, and any bundles or packages of them. As a precaution against interest, the Shariah requires that when money is exchanged for money of the same currency, it must be done at face value; it also prohibits margin and future Sarf. In other words, the exchange of money must fulfill two conditions: the full payment of exchanged quantities of both currencies and delivery executed at the time of contract. Also, to avoid interest, transfers of debts must be performed with no regard to maturity. This means that debts are exchangeable at face value. This is a clear denial of any time value of debt on the ground that debts do not change, increase, or decrease as a result of the passage of time.

Additionally, because real life is usually complex, the “rule of majority” is approved in Shariah and in other legal systems too. The rule of majority states that “when things are mixed, packaged, or bundled together, rulings that apply to the majority apply to all.” Accordingly, when money and debts are mingled with other assets, the rules of sale apply if the majority is physical properties-cum-rights-cum-usufructs. The rules of sale mean that prices are negotiable, determined by consent on the basis of market forces, and can be spot or deferred, and the delivery of sold objects may also be immediate or at a future maturity. Conversely, if the total of money and debts makes a majority, the rule of face value then applies.

Finally, since securitization is a mere representation of assets in financial forms, the Shariah applies the rules that are appropriate to an asset to the security that represents that asset. In other words, a very important principle of Islamic securitization is that a security is only a veil; what matters is what the security symbolizes. Consequently, while all properties can be documented, the Shariah’s acceptable securitization belongs only to physical properties, intangible rights, usufructs, and a bundle or package whose majority consists of any combination of these assets. But if a security represents a sum of money, a debt, or a bundle in which the total of cash and debts makes a majority, the face value rule becomes applicable. The latter implies inability to submit this kind of instrument to market pricing and, therefore, this kind of security cannot be traded in the exchange market.

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What Can Be Securitized from the Shariah Point of View?

A useful exercise includes implementing the above stipulations for securities and seeing how different kinds of assets can be securitized from an Islamic point of view and, at the same time, pointing out those assets that are not recognized for securitization.

Obviously, physical goods, or inventories, can be securitized while they are in the warehouses of companies. Fixed assets can also be securitized, as well as economic rights such as patents, trademarks, franchise rights, exploration rights, and rights to a physical future flow (e.g., right to 5 percent of oil production of a given oil well, or 15 percent of electricity generated by a given generator or power plant). Usufructs, i.e., the right to use a fixed asset for a given period of time, can also be securitized. Services can also be securitized by issuing IOUs that represent a number of units of a well-defined service such as kilowatts of electricity, minutes of phone service, or hours of Internet connection. Finally, we can also securitize a package or bundle consisting of any combination of the above-mentioned properties, even if they have with them any amount of debts and money, provided that the total of these two items does not make a majority of the package. The best example of packages is common stocks.[3] The resulting securities can be sold in the market for any price, discounted or surcharged; they are negotiable and tradable at full scale.

On the other hand, money-based debts (such as CDs, treasury and corporate bonds, and units in a Murabahah fund),[4] cash assets, gold, silver,[5] and rights to a future cash flow, are all kinds of assets that the Shariah requires that their trade or exchange must be at face value by means of either Sarf or Hawalah contracts. These assets cannot be traded at a market price, and they are ruled out from negotiability on the basis of the prohibition of Riba. In addition, there are a few other assets that are also ruled out from tradability according to the Shariah principle of realism, validity, and on moral standards. These include indices that do not represent ownership of any real thing and options.[6]

Kinds of Islamic Securities

Islamic instruments and securities can be structured as output or gross-revenue-sharing securities, net-profit bundle-of-assets equity securities, net-profit-sharing Mudarabah securities, fixed-income leased-assets deeds, floating-price usufructs, or services securities.[7] Most of these securities already exist in the capital markets of several Muslim countries like Malaysia, Indonesia, Saudi Arabia, Bahrain, Kuwait, United Arab Emirates, and Qatar.

The term Sukuk is an Arabic word (singular sak) that means documents. It is used loosely in contemporary Islamic finance literature to mean any Islamic security. It is also used as a specific name for Ijarah (lease)-based securities.[8]

There are three kinds of Ijarah Sukuk. First, there are Sukuk that represent assets leased for a long term (5–20 years); they provide fixed income. Second, there are also Sukuk that represent usufruct units of real estate properties such as hotel rooms and suites; they provide capital gain/loss in addition to the use of the usufruct they represent. And, third, there are hybrid Sukuk that represent bundles of leased properties and Murabahah debts; they also pay a fixed return.

Mudarabah certificates are another kind of Islamic securities. They are based on the Mudarabah contract and have been issued and traded at a small scale in Pakistan since the mid-1980s. Mudarabah certificates are similar to common stocks except that they do not give voting rights to their owners. At the same time, they differ from preferred stocks because they neither have a guaranteed minimum return nor a priority at liquidation.

The beginning of the twenty-first century is witnessing a new phase of Islamic finance with the rise in Sukuk issuance. In its meeting in the summer of 2000, the OIC Fiqh Academy studied the idea of Ijarah securities and issued a famous resolution approving the principle of securitizing leased assets. It also suggested the name Sukuk for them. Since then, Sukuk have been issued by corporations and governments in the Middle East and South and Southeast Asia.

Interestingly, over the last three years, 2002–05, some international bodies like the Islamic Development Bank in Jeddah, the World Bank, and some regional governments in Germany joined this trend by issuing Islamic Sukuk to attract Muslim investors. It is estimated that Sukuk issuance is going on at a growth rate that exceeds 20 percent annually, and in mid-2006, it reached about US$20–25 billion. The secondary market for Sukuk is not yet developed, as none of their issues is circulated or traded because of the high demand in a market that is still far from being satisfied.

Conclusion

During the past two centuries or more, most of the Muslim countries lived under European rule for varying periods. Consequently, civil, business, and penal laws in the great majority of the Muslim countries are derived from the Western codes, and very often these codes were implanted without any changes to accommodate the domestic socio-cultural environment. Some of these laws have been amended over the last half century of independence, yet there is still a lot to be amended too. As a result, business is as usual both from the point of view of the status quo of local business laws; it is also business as usual from the point of view of Islamic law, the Shariah, because Islamic finance contracts are a reflection of the business finances as practiced in reality by all communities.

Yet, doing business with Islamic banks and other financial institutions raises an issue of legality, especially in dispute resolution. Islamic banks normally insist in all contracts that the Shariah should be the law of reference for dispute solving, but since the Shariah is not exactly coded in most cases, there is always a need for defining the meaning of such a clause in legal documents. This requires careful attention to determining specific rules of arbitration and an arbitration body. Fortunately, a group of Islamic banks felt this need. In April 2005, they established an International Islamic Board of Arbitration for Financial Disputes whose offices are in Dubai, UAE. It is yet to set up its rules and procedures. But for now Islamic finance is, in both its essence and practical application, no more than business as usual.

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Reference:

This series is based on a paper published by Dr. Monzer Kahf in 2006.

[1] Quran at 2:282.

[2] Bay` contract is used for physical and intangible properties, rights, and usufructs (Ijarah is the specific term used for usufruct but it is defined as a sale of usufruct), Sarf contract is used for exchange of a currency for other currencies, and Hawalah contract is used for transfer of debt from one person to another.

[3] Although common stocks are defined in finance as a right to a future flow of income, the Shariah definition coincides with the Western legal definition of a common stock as a partial ownership of a company. This ownership covers all the company and its assets and liabilities.

[4] Units in a Murabahah fund represent the assets of the fund that consist of only Murabahah-generated debts and cash.

[5] Gold and silver used to be money at the time of Revelation, and the Sayings of the Prophet mention them. They will remain treated as money out of respect of the text of the law giver.

[6] Options are recognized as financial rights by the OIC Fiqh Academy but they are not permissible to trade on the ground that they are simply created for the purpose of trading and they do not exist on their own in the market, this is yet another application of the principle of realism.

[7] The example of these bonds is a bond that gives a time-sharing right of one week a year in a vacation apartment or hotel room for twenty years that begins, say, on January 1, 2010. This kind of bond presently exists in Saudi Arabia for hotels and suites around the Grand Mosque in Makkah and the Prophet’s Mosque in Madinah.

[8] The word Sukuk is the plural of Suk. It is an Arabic word of Persian origin, ﺻﻚ, that is the origin of the English word check. It means a document, title, or deed.