Why Conventional Bonds Are Prohibited
A conventional bond: the issuer borrows money from the bondholder and promises to repay principal plus interest. This is a loan with riba — prohibited regardless of the wrapper. The holder of a conventional bond is a creditor, not an investor in any real asset.
Sukuk must represent something other than a loan:
- Ownership in a real asset
- Beneficial rights to use an asset
- A share in a project’s output
- A combination of the above
The Ijara Sukuk Structure
The most widely used structure:
- Originator (government or company) sells an asset to an SPV (Special Purpose Vehicle)
- The SPV issues sukuk certificates representing undivided ownership in the asset — investors buy these
- The SPV leases the asset back to the originator (via an ijarah lease)
- The originator pays rent; this rent is distributed to sukuk holders as their periodic return
- At maturity, the originator buys back the asset at agreed price; the SPV repays sukuk holders
The sukuk holder’s return is rental income from the asset, not interest. The legal form is ownership and lease, not lending and borrowing.
Other Sukuk Types
- Sukuk al-Murabaha: certificates representing ownership of goods in a murabaha transaction
- Sukuk al-Mudaraba: certificates representing a share in a mudaraba fund
- Sukuk al-Musharaka: certificates representing ownership share in a partnership
- Sukuk al-Istisna’: certificates for future delivery of a manufactured/constructed asset
The 2008 AAOIFI Controversy
In 2008, the AAOIFI Chairman Sheikh Muhammad Taqi Usmani issued a statement declaring that 85% of sukuk in the market were not Sharia-compliant — they had been structured with guaranteed principal repayment, which made them economically equivalent to bonds. The true owner-investor relationship had been contracted away. This triggered a major re-evaluation of sukuk structures across the Islamic capital markets.
See also: Fiqh Al Ijarah, Fiqh Al Musharakah, Fiqh Al Mudarabah, Fiqh Al Istisna, Fiqh Al Aqd, Waqf