Sukuk and Islamic Fixed Income

Islamic law prohibits riba, interest charged simply for the use of money, which means a conventional bond — a loan that pays interest — is not permissible under Shariah. Sukuk are the workaround the industry built: instead of lending money for interest, an investor buys a certificate representing partial ownership of a real asset (a building, a fleet of aircraft, a toll road), and the "coupon" is really a share of the rental or profit that asset generates.

The most common structure is sukuk al-ijara, built around a sale-and-leaseback: the issuer sells an asset to a special-purpose vehicle, which leases it back and pays rent to the sukuk holders. That rent stream looks and behaves exactly like a bond coupon in cash-flow terms, and at maturity the issuer buys the asset back at a pre-agreed price, returning the equivalent of principal.

Worked example. A government wants to raise $1 billion for 5 years. It sells a portfolio of government buildings worth $1 billion to a sukuk trust, which issues certificates to investors funding that $1 billion. The trust leases the buildings back to the government for an annual rent of $50 million (a 5% "yield"), and after 5 years the government repurchases the buildings for $1 billion, at which point investors are repaid in full.

Because the cash-flow profile so closely tracks a conventional bond, sukuk trade with reference to the same yield curves and are analyzed with the same duration and credit tools that price ordinary fixed income.