The Theory and Practice of Profit Sharing Investment
Edited by Mohamed Ariff, Munawar Iqbal and Shamsher Mohamad
Chapter 3: History of Sukuk: Pragmatic and Idealist Approaches to Structuring Sukuk
Abdullah Saeed and Omar Salah 3.1 INTRODUCTION Sukuk are Islamic securities that are often translated as Islamic bonds. However, the term ‘Islamic bond’ does not entirely cover the substance of sukuk. A closer look at sukuk shows that sukuk have elements that might resemble both shares and bonds, depending on the applicable underlying Islamic financial contract terms and structures. In this chapter we will outline the backgrounds of sukuk providing a better understanding of sukuk as Islamic financial instruments. This chapter is motivated to illustrate the discrepancy in the idealistic approach to sukuk structures. That is, how this financial product ideally should be structured from a shari’ah perspective, as compared with a pragmatic approach adopted at this early stage of the market development, in other words, how it is structured in practice. In order to place sukuk in context, first some concepts associated with shari’ah that are relevant to any conceptualization of sukuk will be briefly mentioned in section 3.2. These include key sources of shari’ah as well as concepts of ijtihad, riba and gharar. In the following historical overview of sukuk in section 3.3, we provide particular focus on the origins of the word ‘sukuk’, its use in medieval times and the recent history of sukuk, known today as new financial instruments in financial and capital markets. Finally, the development of several forms of sukuk will be described, explaining a number of structures and mechanisms that have been developed in practice over the years, highlighting the tension between the...
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