What are sukuk . Sukuk are Islamic finance instrument which have a certain similarity to stocks and bonds at the same time. On one hand they represent real property such as an airport or highway and on the other hand they often give fixed income (some Sukuk can be issued with variable income).
The idea is very simple; if the government decides to build a highway from Cairo to Fayyum, the cost of it is 1000 million pounds. It issues 10 m Sukuk for 100 pound each. These will represent the ownership of the highway itself (buyers ofSukuk are the real and true owners of the highway which is going to be built).
In the issuance (called prospectus – nashret isdar in Arabic) itself the government takes a wakalah from the Sukuk holders to build this highway according to attached specification. Then getting the money from the buyers (public) allows the government by virtue of the wakalah to contract contractors who will build it. The prospectus also includes two other very important points:
- The government will rent this highway from its owners for 60 m a year for say 15 years (this gives the holder 6% income);
- The government pledges to buy this bridge on a piece by piece basis over a period of 15 year too at its cost price.
This means that the Sukuk will be amortized over the same 15 years. This way the government gets the highway built and financed without borrowing.
Of course, there are many additional details about especially maintenance and building confidence and ways of distribution and construction period which are usually tackled in the prospectus.
(Monzer Kahf – OnIslam / 13 March 2012)