January 26, 2022

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Sukuk Bonds (Investment) Meaning and Key Explanations

Sukuk Bonds (Investment) Meaning and Key Explanations
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Have you heard of Islamic Financing? Sukuk bonds are an example of such. In Nigeria, upon the acceptance of Islamic banking, this source of funding projects and businesses is a thing you should know if you’re interested in investing.

Definition of Sukuk Bonds

1. Sukuk bonds as defined by SEC in Nigeria are “investment certificates or notes which evidence proportionate interest in ownership of tangible assets, usufructs, and services or investment in the assets of particular projects or special investment activity that adhere to the principles of Shariah.”
2. Also, it can be are defined as a type of halal investment where certificates or notes are issued to the bearer as evidence of part ownership of an investment, project, income-generating assets, or business.

Key Explanations

An Islamic investment. Sukuk bonds are one of the four types of halal investment vehicles. Others are Ijara, Murabaha, and Halal equity funds. However, the focus is on the one discussed in this article. Here, a certificate is issued to the bearer or the investor. The certificate or note serves as evidence. That is proof of owning a proportion of the fund.

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Profit-Sharing. The principle of most Islamic funds is all about profit sharing and Sukuk bonds are no exception. The invested money is pooled into the project, business, or acquire the income-generating assets. Next, the fund will earn income and later on profit. It is the profit that is shared with each investor.

Sharia principle. One sharia principle is the use of profit-sharing as a method of rewarding investors. Also, the money invested must not be used in shady businesses. This includes illegal businesses and anything condemned by Islam. Using such funds for investing in alcohol business, speculation and gambling are against this type of financing.

Examples. In Nigeria, there are examples of these types of investments and you can invest in them through mutual funds. In May 2020, the Nigeria Federal Government issued its 150 Billion Naira FGN Sovereign Sukuk Bonds. With a coupon rate of 11.20 percent. And is available for 7 years. Investors earn from it daily in the form of capital appreciation and profit-sharing.

Other terms used in Sukuk Bonds

Income Generating Assets. Income-generating assets can be tangible or intangible assets. Examples are marketing rights or concession agreements. When profit is earned, it is shared among the investors as agreed. Trading of assets is not allowed. However, any tradable assets must comply with the sharia principle. That is one-third of such assets must be kept in tangible form.

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Usufructs. A legal right granted to a person to use another person’s assets to earn income and profit.

Special investment activities. The Sukuk Bonds can be used to build the social infrastructure of a country.

Conclusion

Sukuk bonds are halal investments that comply with sharia principles. The funds can be used to acquire income-generating assets. It is as well used to run a business or project and build social infrastructure. Investors are part owners, therefore share a proportion of the profit earned.

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