Sukuk: Understanding Islamic Bonds and Why the Structure Is Everything

Author: Zaid Alissa, CTO & Halal Finance Researcher | Published: Feb 2024 | Updated: March 2026

In 2023, global sukuk issuance exceeded 180 billion US dollars. Sovereign governments from Saudi Arabia to the United Kingdom have issued sukuk. Corporations in sectors from energy to technology have used them to raise capital. The market has grown from a specialist instrument used primarily in Malaysia and the Gulf into a mainstream fixed-income asset class with participants on every continent.

For Muslim investors looking for income-generating assets that do not involve holding conventional bonds, sukuk appear to offer a solution. In many cases they do. In some cases they do not. The difference is entirely in the structure, and understanding why requires engaging seriously with what a sukuk is, what it is not, and what the scholarly debate about some structures actually means for the money you put into them.

A conventional bond is a debt instrument. When you buy a corporate bond, you are lending money to the issuing company. In return, the company promises to pay you interest at a specified rate and to return the principal at maturity. The return is predetermined. It does not depend on what the company does with the money or whether the underlying business performs well. You are a creditor, not an investor in any economically meaningful sense.

This structure is impermissible in Islamic law for the reason at the heart of all riba prohibitions. Your return is contractually guaranteed regardless of economic outcome. You are profiting from the passage of time rather than from any productive activity. The company could lose money every year of the bond's term and still owe you the same interest payments.

A sukuk, properly structured, is something fundamentally different. It is a certificate of ownership in an underlying asset, pool of assets, or a productive enterprise. You buy a sukuk and you become the beneficial owner of something real: a building, a toll road, a portfolio of lease agreements, a ship. Your return comes from the income that thing generates. If the asset generates income, you receive your share. The return is connected to economic reality rather than divorced from it.

This is not a technicality. It is the structural difference that determines whether the instrument is permissible and whether it actually behaves differently from a conventional bond in practice.

There are several AAOIFI-recognised sukuk structures, each suited to different underlying asset types and issuer needs. The four most common in international markets are ijarah, musharakah, murabaha, and wakalah sukuk.

Ijarah sukuk are the most straightforward and the most widely accepted by scholars across different schools. The issuer sells an asset, typically real estate or equipment, to a special purpose vehicle. The SPV issues sukuk certificates representing ownership of that asset. The SPV then leases the asset back to the original issuer, who pays lease rentals. Those rentals are distributed to sukuk holders as their periodic income. At maturity, the SPV sells the asset back to the issuer, and the proceeds repay the principal. The sukuk holder genuinely owns a share of a real asset and receives income from the use of that asset.

Musharakah sukuk represent a share in a joint venture or existing business. The sukuk holders co-own a portion of the venture and receive their share of profit distributions. These are more complex to structure and carry genuine profit-sharing economics, making them the most intellectually honest expression of Islamic finance principles but also the most demanding to manage.

Murabaha sukuk are more controversial. Because murabaha receivables represent a debt obligation at a fixed price, most scholars, and AAOIFI, consider them non-tradeable in the secondary market at anything other than face value. Malaysian shariah authorities take a different view, permitting the sale of debt (bay al-dayn), which is why murabaha sukuk trade actively in Malaysia but rarely in Gulf-anchored international markets. A sukuk based entirely on murabaha receivables cannot be bought and sold after issuance without falling into the prohibition on trading debts at a discount. This severely limits liquidity and is why pure murabaha sukuk are relatively rare in international markets.

Wakalah sukuk use an agency structure where the sukuk proceeds are deployed by an investment agent according to a specified mandate, typically a mixed portfolio of ijarah and murabaha assets. Because the portfolio contains tradeable ijarah assets above a minimum threshold, the sukuk itself becomes tradeable. The threshold is not settled: shariah boards apply figures ranging from 33 percent to a majority of the pool, and AAOIFI Shari'ah Standard No. 21 requires tangible assets to predominate for unrestricted secondary trading. Wakalah sukuk have become the dominant structure in many markets because of their flexibility.

In 2007, Sheikh Muhammad Taqi Usmani, one of the most respected and widely followed contemporary Islamic finance scholars, issued a statement that sent the sukuk market into temporary shock. In remarks widely reported in November 2007, and developed in his paper Sukuk and Their Contemporary Applications presented to the AAOIFI Shari'ah Council, he argued that the large majority of sukuk then being issued, a figure reported at around 85 percent, did not genuinely comply with shariah requirements.

His specific concern was with structures that included purchase undertakings, contractual commitments by the originator to repurchase the underlying asset at face value at maturity, regardless of the asset's market value at that time. This mechanism effectively guaranteed the return of principal to sukuk holders in a way that replicated the capital protection feature of a conventional bond.

Allah says in Surah Al-Baqarah, verse 279:

وَإِن تُبْتُمْ فَلَكُمْ رُءُوسُ أَمْوَالِكُمْ لَا تَظْلِمُونَ وَلَا تُظْلَمُونَ

"But if you repent, you may have your principal - [thus] you do no wrong, nor are you wronged." (Saheeh International)

The verse permits recovery of principal but in the context of exiting an interest-based arrangement, not as the defining feature of an investment. Sheikh Usmani's argument was that a sukuk structured to guarantee both periodic income and principal recovery is economically identical to a conventional bond. The Islamic contract forms are present, but the risk-sharing substance is absent.

The market responded by developing cleaner structures, and AAOIFI updated its standards to address the most egregious practices. But the underlying tension has not fully resolved. Some sukuk in the market today still include economic features that approximate capital guarantees. As an investor, this matters because it affects both the shariah permissibility of the instrument and its genuine risk profile.

The due diligence framework for sukuk has three components. First, identify the underlying asset or pool of assets and confirm they are real, tangible, and income-generating. A sukuk backed by a portfolio of commercial real estate leases has genuine asset backing. A sukuk backed primarily by murabaha receivables has limited tradeable value and limited genuine ownership content.

Second, examine the purchase undertaking. If the sukuk documentation includes a commitment by the originator to repurchase the asset at face value at maturity regardless of market conditions, ask who gives the undertaking and at what price. Under the AAOIFI Shari'ah Board resolution of February 2008, a commitment to repurchase at nominal value is impermissible when given by a mudarib, partner, or investment agent, since it guarantees the investors' capital, but is permissible when given by a lessee in an ijarah sukuk, and repurchase at market value or at a price agreed at the time of purchase is broadly accepted.

Third, verify the shariah board. Every credible sukuk issuance has an opinion from a qualified shariah supervisory board. That opinion should be publicly available and should address the specific structure of the issuance, not simply certify that the transaction is halal in general terms. If the shariah opinion is vague or unavailable, the issuance does not meet the basic transparency requirements for a well-governed Islamic product.

For most retail Muslim investors, direct sukuk investment is not the primary entry point. Sukuk funds, which pool investor capital and build diversified portfolios of sukuk instruments, provide more practical access. The same due diligence principles apply at the fund level: does the fund have an active shariah board? Does it publish the structures of its holdings? Does it track and disclose any purification obligations?

The income profile of sukuk, typically more stable than equity and more transparent than some structured products, makes them valuable for Muslim investors seeking regular income without conventional bond exposure. The global sovereign sukuk market, anchored by Malaysian, Saudi, and Indonesian issuances, provides a benchmark for credit quality and pricing that has matured significantly over the past decade.

Sukuk are a genuine Islamic finance innovation and a legitimate income-generating asset for Muslim investors who understand what they are buying. The structure is not cosmetic. It represents a genuine attempt to create an instrument that provides bond-like income characteristics while remaining grounded in real asset ownership rather than debt obligation.

The caveat is that the label does not guarantee the substance. Some sukuk structures are more robust than others. Some have attracted legitimate scholarly criticism. The investor who understands the difference between ijarah sukuk backed by genuine assets and a structure designed to replicate conventional bond economics in Islamic clothing is the investor who can use the instrument well.

What is a sukuk? A sukuk is a certificate of ownership in an underlying tangible asset, pool of assets, or productive enterprise. The holder receives income because they own something that generates income, not because they have lent money.

How is a sukuk different from a conventional bond? A conventional bond is debt: a promise to repay principal plus interest. A sukuk is ownership: a claim on the income produced by a real asset. The structural difference is what determines permissibility under Islamic law.

What are the main types of sukuk? The four most common structures are ijarah (asset-leasing), musharakah (partnership), murabaha (cost-plus sale), and wakalah (agency over a mixed asset pool). Ijarah and wakalah dominate the international sukuk market.

What was Sheikh Taqi Usmani's 2007 statement about sukuk? In 2007 Mufti Taqi Usmani estimated that approximately 85 percent of then-circulating sukuk failed key shariah requirements, primarily because of purchase undertakings that guaranteed principal recovery regardless of asset value, effectively replicating conventional bond economics. The market subsequently developed cleaner structures and AAOIFI updated its standards.

Are sukuk safer than conventional bonds? Not necessarily. Properly structured sukuk transfer some economic risk of the underlying asset to the holder. This is by design. The risk profile of a sukuk depends on the assets backing it and the specifics of the issuance.

This article is for education only. It is not financial advice and not a fatwa. Consult a qualified shariah scholar and a regulated financial adviser before investing in any sukuk.