Sukuk Finance, according to the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI), can be defined as certificates of equal value representing undivided shares in the ownership of tangible assets, usufructs, and services or (in the ownership of) the assets of particular projects or special investment activity. It is an Islamic financial certificate which is similar to a conventional bond, which is in compliance with the Islamic religious law known as Sharia.

The major difference between Sukuk and a Conventional Bond is that the former involves the funds provider having ownership of real assets and receiving a return that is achieved from those assets, while the latter involves the funds’ provider (investor) having a debt instrument, earning returns predominantly through the payment of interest. Under Sharia law, the interest, which is known as Riba, is prohibited.

Real Life Example of Sukuk transaction: The Federal Government of Nigeria did a Sukuk Al Ijarah (Lease) issue in December 2021 through an SPV known as FGN Roads Sukuk Company 1 Plc. The instrument has a size of up to N250 billion with a 10-year tenor. The funds would be employed in financing rehabilitation and construction of road projects identified by the Federal Ministry of Works and Housing.

Characteristics of Sukuk

• Sukuk has elements of both equity (ownership in the underlying asset) and debt (periodic payments), making it a hybrid instrument.
• The asset on which the Sukuk is based must be Shariah-compliant
• The price of a Sukuk is derived from the value of the assets backing it.
• Returns on a Sukuk investment could increase when the value of the underlying assets rises.
• The initial investment is not guaranteed as the holder of the Sukuk may/may not receive the entire principal back due to the shared risk of loss.
• Should the issuer default, the Sukuk holders will take possession of the assets and can either keep them or sell them to other buyers.

Basic Sukuk Structure

Types of Sukuk

There has been considerable debate as to what type of financial instruments Sukuk instruments are, and this is because of the two types of Sukuk that exist:

1. Asset-Based Sukuk: This type of Sukuk involves raising capital whereby the principal invested is covered by the capital value of the asset involved, but the repayments and returns made to the investors are not financed directly by these assets.
2. Asset-Backed Sukuk: When raising finance through an asset-backed Sukuk, the capital is covered by the capital value of the asset, with the returns and repayments to the investors being directly financed by these assets.

Meristem Capital Limited can provide capital raising services by guiding its clients seeking to raise finance in compliance with the Sharia Law on the most appropriate structure in undertaking a Sukuk Financing process, after having analysed and assessed the capital structure of the company. Also, Meristem Capital Limited can help identify and network with appropriate investors/lenders, such as high-net-worth individuals or financial institutions.