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Home > Financing Best Practice > Islamic Capital Markets: The Role of Sukuk

Financing Best Practice

Islamic Capital Markets: The Role of Sukuk

by Rodney Wilson

Executive Summary

  • Conventional bills, bonds, and notes which pay interest are unacceptable from an Islamic perspective.

  • Tradable financial instruments using Islamic structures were introduced in Pakistan in 1980 and Malaysia in 1990.

  • The defining characteristic of sukuk is their asset backing.

  • There remains much controversy over sukuk structures, especially among shariah scholars.

  • There is growing worldwide interest in sukuk, including from the Treasury in the United Kingdom.

Incompatibility of Conventional Financial Market Instruments with Shariah Law

Islamic capital markets are made up of two components, stock markets and bond markets. This contribution is primarily concerned with the latter rather than shariah-compliant stock determination. In particular it is sukuk that have become the accepted Islamic alternative to conventional bills, bonds, and notes, and hence are the major focus here.

Conventional capital market instruments such as treasury bills, bonds, and notes are unacceptable from a shariah Islamic legal perspective as they involve interest payments and receipts. Interest is equated with riba, an unjust addition to the principal of a debt, and is seen as potentially exploitative. Islamic economists prefer equity to debt financing because of the risk-sharing characteristics of the former, which is viewed as fairer to all parties. They are also concerned about the injustices that often arise with excessive indebtedness, as in the case of developing country debt, or simply the higher interest charges often faced by those with no collateral to offer and the poor more generally.

Nevertheless, government and corporate borrowing is unavoidable, and can indeed be beneficial if the finance is used productively for investment that can contribute to employment and prosperity. Bank lending, however, commits assets on a long-term basis and reduces liquidity. The advantage of using capital market instruments to raise finance is that investors can exit at any time rather than wait for assets to mature. Furthermore, the investment banks that arrange the issuances earn fees and do not have to commit their own resources, unless the bill, bond, or note issue is not taken up, in which case, as underwriters, they will have to purchase the issuance.

The Introduction of Islamic Capital Market Instruments

There are no shariah objections to financial markets, only to the interest-based instruments which are traded in the markets. Therefore, the first attempt to develop shariah-compliant debt instruments involved securitizing traditional Islamic financing instruments, as with the mudaraba certificates issued in Pakistan from 1980 onward after a law was passed giving legal recognition to the certificates. Mudaraba involves the establishment of partnership companies with investors, and the company managers share in the profits, but the financiers alone bear any losses. In 2008 the original law was amended to bring the mudaraba companies under the regulatory supervision of the Securities and Exchange Commission of Pakistan, the aim being to ensure better investor protection.

In Malaysia, where Islamic banking started in 1983, a natural innovation was to securitize the debt instruments used, mainly murabaha financing, where a bank would purchase a commodity on behalf of a client and resell it to the client for a markup, with settlement through deferred payments. The first instrument was issued by the Shell oil company’s Sarawak subsidiary in 1990, with Bank Islam Malaysia as the arranger. By attracting third-party investors interested in benefiting from these deferred payments, the bank could use its capital for further financing rather than having it committed on a long-term basis. This debt trading, known as bai al-dayn, is permitted by the Malaysian interpretation of the Shafii School of Islamic jurisprudence which prevails in Malaysia and Indonesia, but is not permitted in Saudi Arabia or the Gulf. Scholars of Islamic jurisprudence in the Gulf believe that debtors should know who they are indebted to, rather than having their debt obligations traded in an impersonal market.

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Further reading


  • Nathif, Adam, and Thomas Abdulkader. Islamic Bonds: Your Guide to Issuing, Structuring and Investing in Sukuk. London: Euromoney Books, 2004.
  • Obaidullah, Mohammed. “Securitization in Islam.” In M. Kabir Hassan and Mervyn K. Lewis (eds). Handbook of Islamic Banking. Cheltenham, UK: Edward Elgar, 2007; pp. 191–199.


  • Cox, Stella. “The role of sukuk in managing liquidity issues.” New Horizon: Global Perspective on Islamic Banking and Insurance 163 (January–March 2007): 38–39. Online at:
  • Jabeen, Zohra. “Sukuk as an asset securitisation instrument and its relevance for banks.” Review of Islamic Economics 12:1 (2008): 57–72.
  • Samsudin, Anna Maria. “Sukuk strikes the right chord.” Islamic Finance Asia (August/September 2008): 16–24. Online at:
  • Wilson, Rodney. “Innovation in the structuring of Islamic sukuk securities.” Humanomics 24:3 (2008): 170–181. Online at:



  • Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI):

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