Gulf’s Islamic Sukuks offerings should get closer attention from retail investors

Sukuks, often (incorrectly!) referred to as Islamic bonds, are gaining popularity in Middle East markets as an alternative to conventional fixed-income instruments. These adhere to Islamic principles and are a popular choice among investors looking for stability and predictable returns.

Global sukuk issuance exceeded market expectations reaching $193.9 billion in 2022, with Malaysia maintaining its leading position with $80 billion, and Saudi Arabia coming second with $44.7 billion. The UAE government has been a major issuer, with the $275 million (Dh1.1 billion) UAE T-Sukuk seeing strong demand through its eight primary bank dealers, with bids worth $2.3 billion (Dh8.3 billion), and an oversubscription of 7.6 times.

This year witnessed First Abu Dhabi Bank selling an international sukuk worth over $500 million. And the UAE government issued an additional Dh550 million.

What are Sukuks?

While conventional bonds represent a debt obligation of the issuer, Sukuks are investment certificates that represent proportionate entitlement to a share of the returns generated by an underlying asset and a return of the capital at a predefined future date. They are structured in a way that complies with the Islamic principles of no-interest lending (or ‘riba’), and no investment in prohibited industries such as gambling, alcohol or tobacco.

The underlying asset can be tangible such as real estate or infrastructure, or an intangible such as a revenue-generating project or tradeable commodities.

Sukuks are designed to provide investors with a return on their investment, unlike the interest payments provided by conventional bonds. This makes sukuk a better option for investors seeking stability and predictable returns.

How do Sukuks work?

These are issued by corporations, governments, and other issuers seeking to raise capital while adhering to Islamic principles. These issuers appoint Islamic banks to act as their agents, who in turn create special purpose companies (SPCs) to hold the underlying assets. The SPC then issues the sukuk certificates which are sold to investors.

Investors who buy into sukuk are given a proportional ownership stake in the underlying assets, and are entitled to a share of the profits derived from the assets. If the assets generate profits, the sukuk holders receive a return on their investment.

If there are no profits, the investor receives no return, but they still hold an ownership stake in the underlying assets. At the end of the sukuk term, the underlying assets are sold and the proceeds are distributed among the sukuk holders.

How to invest

There are several avenues available to get started.

Direct purchase

One way to invest in sukuk is to directly purchase them from the primary market when they are issued. These are typically made by governments, corporations, or other issuers looking to raise capital. Investors can participate in the sukuk issuance by contacting their financial advisor or broker, who can facilitate the purchase on their behalf.

Secondary market trading

Sukuks can also be purchased on the secondary market after their initial issuance. This option allows investors to buy and sell sukuk certificates on an exchange, similar to how conventional bonds are traded. It provides investors with liquidity and flexibility, as they can enter or exit their investment positions based on market conditions and their investment objectives.

Exchange-Traded Funds

Another way to invest is through exchange-traded funds (ETFs) that focus on sukuk investments. These ETFs pool investors' money and invest in a diversified portfolio of sukuk securities. Investing in sukuk ETFs provides investors with exposure to a basket of sukuk issuances, offering diversification and ease of trading.

Mutual funds

These funds are managed by professional fund managers who specialize in understanding the sukuk market and selecting the most suitable securities for the fund. Investing in sukuk mutual funds allows investors to benefit from professional expertise and the ability to invest with smaller amounts of capital.

Islamic banks and financial institutions

Such institutions offer various sukuk investment products and services, including fixed-term deposit products and investment accounts that provide exposure to sukuk securities.

Investing in sukuk provides investors with the opportunity to diversify their portfolios and access stable, Sharia-compliant investment options. By considering factors such as risk profile, issuer credit quality, and potential yield, investors can make informed decisions to align their investments with their financial goals and values.

As the sukuk market continues to expand and evolve, more investment opportunities are becoming available for those seeking corporate insight and the benefits of sukuk investing in the Middle East and beyond.