The launch of a secondary market for Sukuk bonds by the Saudi Arabian Capital Market Authority [CMA] has led to Ulama and religious scholars issuing a number of fatwas and statements prohibiting this. The majority of these fatwas and statements were unwritten [i.e. issued verbally] and so were missing many details. Many people also circulated messages via mobile phone of a fatwa issued by the Islamic Fiqh Academy that deals with bonds, but does not mention Sukuk, which is an alternative to bonds that are forbidden under the provisions of Islam. These statements and reports did not take into account the secondary market launched for Sukuk, as this market consists solely of Sukuk that comply with the provisions of Islamic Sharia law and whose documentation have been verified by a legal authority comprised of a number of religious scholars including members of the Council of Senior Ulama and the Islamic Fiqh Academy.
The statements and fatwas mentioned above have caused ambiguity among the public with regards to the legality of circulating Sukuk. Members of the public have asked me to clarify this, and explain the difference between Sukuk and bonds, and the legal status of each. The difference between Sukuk and bonds can be most easily seen by defining each term;
Bonds are securities in the form of a debt that will be paid back before a certain date, termed the date of maturity, in addition to interest [on this debt]. In short, a bond is a debt security in which borrowed money is repaid along with interest at a fixed rate.
Sukuk are financial fixed income certificates that are permissible within the provisions of Islamic Sharia law as they are raised on trading in, or construction of, specific and identifiable assets [rather than being interest based like bonds].
We can therefore see the difference between bonds and Sukuk. Bonds are a proof of debt, whereas Sukuk are a proof of ownership. Bonds also include a fixed rate of interest regardless of loss or gain, while the income from Sukuk is related to the original legal contract that governs the relationship between the Sukuk provider and the customer [owner of the Sukuk]. Bonds expire at their pre-agreed value, whereas Sukuk expire at either their market value, a prearranged figure [agreed upon by the two parties] or a fair value.
As a result the Islamic Fiqh Academy issued Resolution 60 (6/11) concerning bonds that. It states the following:
The Council of the Islamic Fiqh Academy, in its sixth session held in Jeddah, Kingdom of Saudi Arabia from 14-20 March 1990 studied the papers and recommendations presented and conclusions reached in the seminar held in Rabat [Morocco] between 20-24 1989 on the subject of ‘Financial Markets’ in cooperation between the Islamic Fiqh Academy and the Islamic Research and Training Institute of the Islamic Development Bank and hosted by the Ministry of Endowment and Islamic Affairs of the Kingdom of Morocco. A bond is a certificate by which the issuer undertakes the liability of paying its face value to the bearer on its maturity along with an agreed interest relating to its value or to a pre-determined profit, either in lump-sum or as a discount or in the form of prizes to be distributed on the basis of ballot resolves.
First: The bonds which represent an undertaking to pay its amount along with an interest related to its face value or to a pre-determined profit are prohibited in Sharia. Their issuance, their purchase, and their negotiation are all prohibited because they are interest-bearing loans, no matter whether their issuing authority belongs to the private sector or is a public entity related to the state. The change in the nomenclature, such as calling the bonds “certificate” or “investment securities” or “saving certificates” or calling the interest “profit” or “income” or “service charge” or “commission” has no effect on the aforesaid ruling.
Second: The “zero coupons bonds” are also prohibited because they are loans sold at a price inferior to their face value, and the owners of such bonds benefit from the difference in their prices which is considered a discount on the bonds.
Third: Similarly, “prize bonds” are also prohibited because they are loans in which a liability to pay a pre-determined profit or an additional amount is undertaken in favour of their bearers as a whole, or in favour of an undermined number of persons out of them. Moreover, these bonds have a resemblance with gambling (“Qimar”).
Fourth: The interest bearing bonds can be substituted by the bonds and certificates issued on the basis of the contract of “Mudharabah” (Profit and loss sharing) meant for a particular project or a particular enterprise, wherein no pre-determined profit or interest shall be paid to the bearers, but they shall be entitled to get a proportional share in the profit of the project in relation to the proportion of their respective investments. This profit cannot be given to them unless it has been actually yielded.
The formula that has been approved of by Resolution 30 (4/5) on speculation bonds could be put to use here.
As for Sukuk, the Islamic Fiqh Academy has made several resolutions permitting their issuance and circulation in accordance with the terms stated in these resolutions. An example of this is the aforementioned resolution on speculation bonds and Resolution 137 (3/15) on tenancy bonds, as well as Resolution 178 (4/19) on Islamic bonds (Tawarruq) and their contemporary applications and circulation. This is the latest that has been issued by the academy in this regard. We will now see the difference between bonds and Sukuk in terms of issuance and circulation.