Sukuk pricing distorted by thin secondary market

Sukuk — Islamic bond in a nutshell

• Sukuk is the Arabic name for a financial certificate but can be seen as an Islamic equivalent of bond. However, fixed income, interest bearing bonds are not permissible in Islam, hence sukuk are securities that comply with the Islamic law and its investment principles, which prohibits the charging, or paying of interest. Financial assets that comply with the Islamic law can be classified in accordance with their tradability and non-tradability in the secondary markets.

• Conservative estimates by the Ten-Year Framework and Strategies suggest that over $700bn of assets are managed according to Islamic investment principles. Such principles form part of sharia, which is often understood to be ‘Islamic Law', but it is actually broader than this in that it also encompasses the general body of spiritual and moral obligations and duties in Islam.

• Sharia-compliant assets worldwide are worth an estimated $500bn and have grown at more than 10 percent per year over the past decade, placing Islamic finance in a global asset class all of its own. In the Gulf and Asia, Standard & Poor's estimates that 20 percent of banking customers would now spontaneously choose an Islamic financial product over a conventional one with a similar risk-return profile.

• With its Arabic terminology and unusual prohibitions, sukuk financing can be quite mystifying for the outsider. A good analogy is one of ethical or green investing. Here the universe of investable securities is limited by certain criteria based on moral and ethical considerations. Islamic finance is also a subset of the global market and there is nothing that prevents the conventional investor from participating in the Islamic market.

• In classical period sukuk - which is cognate with the European root "cheque" (which itself derives from Arabic) - meant any document representing a contract or conveyance of rights, obligations or monies done in conformity with the Sharia.