Sukuk Explained: What Islamic Bonds Are and How They Work

What is sukuk? The meaning in plain words

Sukuk (singular sakk, meaning a certificate or deed) are certificates that give the holder a share in the ownership of an asset, a service, a project or a business activity. In English they are often called Islamic bonds, but that name is not exact.

A conventional bond is a loan. The investor lends money and the issuer promises to repay it with interest. Islamic law treats interest on a loan as riba, which is prohibited (see Riba explained). A sukuk is meant to work differently. The holder owns part of something real and earns a return from it, such as rent, sale profit or business profit.

In short, sukuk are ownership certificates that are built to work like bonds for the investor.

How a sukuk is set up

Most sukuk follow the same basic steps:

1. The company or government raising money is called the originator. It sets up a separate entity, usually a special purpose vehicle (SPV), to hold the assets.
2. The SPV issues sukuk certificates to investors and collects their money.
3. The SPV uses the money to acquire assets or rights from the originator, or to enter a contract with it.
4. Income from those assets flows to the sukuk holders.
5. At maturity, the originator usually buys the assets back and the holders receive their capital.

The type of underlying contract decides which form the sukuk takes. The contracts themselves are covered in more detail on our page on Islamic finance contracts.

Main sukuk structures

Ijara sukuk (lease)

The SPV buys an asset, such as a building, a road or land, from the originator. It then leases the asset back to the originator. The rent is passed to the sukuk holders. At the end of the term, the originator buys the asset back.

Ijara sukuk are widely accepted by scholars. The holders own a real asset that produces rent, so the certificates can usually be traded on a secondary market. The government of Pakistan has relied heavily on ijara-based sukuk for its domestic Islamic borrowing.

Murabaha sukuk (cost-plus sale)

The SPV uses investor money to buy a commodity. It then sells the commodity to the originator at cost plus a disclosed profit, payable later. The holders are owed that deferred sale price.

Once the sale is complete, the holders own a debt, not an asset. Most scholars do not allow debt to be sold for anything other than its face value. For that reason, murabaha sukuk are generally held to maturity and are not freely traded. Some Malaysian practice has taken a more permissive view of debt trading. Most Gulf and Pakistani scholars do not share it.

Wakala sukuk (agency)

The originator acts as an agent (wakil) for the holders. It manages a pool of assets on their behalf for a fee and passes on the expected profit. The pool often mixes leased assets, murabaha receivables and other holdings.

Wakala sukuk are flexible, and they are common in international issues. Scholars usually expect the pool to hold enough tangible assets, rather than mostly debts, for the certificates to be tradable. How much is "enough" is a point on which Shariah boards differ.

Other forms

• Mudaraba sukuk: holders provide capital, the originator provides management, and profit is shared at an agreed ratio. Holders bear the loss of capital if the venture fails.
• Musharaka sukuk: holders and the originator are partners in a venture and share profit and loss.
• Istisna'a sukuk: these fund the construction or manufacture of an asset to be delivered later.

Sukuk vs conventional bonds

In practice, many sukuk pay a periodic amount that looks much like a bond coupon, and the risk often depends on the originator's credit. This similarity is at the centre of the scholarly debate below.

Standards and scholarly views

AAOIFI

The Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI), based in Bahrain, publishes a Shariah standard on investment sukuk. Its main points are:

• Holders must own the underlying assets, with the rights and risks of ownership.
• Tradable sukuk should represent real assets or usufruct, not mainly debts.
• In mudaraba, musharaka and wakala sukuk, the manager should not promise to buy the assets back at face value. A repurchase at market value or an agreed fair value is acceptable. Ijara sukuk are treated differently, because the lessee may undertake to buy the leased asset back at an agreed price.

The debate on "asset-based" sukuk

Mufti Muhammad Taqi Usmani, who chaired the AAOIFI Shariah board, published a widely discussed paper criticising many sukuk in the market. His concerns were:

• Holders often have no real ownership. These are called asset-based sukuk, as opposed to asset-backed sukuk.
• Capital was effectively guaranteed through repurchase at face value.
• Returns were set with reference to interest benchmarks.

AAOIFI then issued guidance tightening these points.

Other scholars and Shariah boards hold a different view. In their opinion, asset-based structures are valid when the underlying contracts are sound, even if the investor relies mainly on the originator's credit. They also argue that using a market interest rate only as a pricing reference does not make the return riba, as long as the contract itself is a lease or sale.

Critics answer that a structure which reproduces a loan in substance falls short of the aims of Islamic finance. Our pages on Islamic finance principles and gharar and maysir give more background on these principles.

National bodies

Several countries have their own Shariah authorities:

• In Malaysia, the Shariah Advisory Councils of the central bank and the securities commission decide these questions.
• In Pakistan, the State Bank of Pakistan has a Shariah Board for Islamic banking and has adopted a number of AAOIFI standards for Islamic banks.
• The Federal Shariat Court ruling on riba has also increased the focus on moving government borrowing to Islamic instruments.

Each issue's own Shariah pronouncement (fatwa) names the scholars who approved it. Investors who want to judge compliance can read it in the offering documents.

We do not give a ruling. A reader who needs one should ask a qualified scholar they trust.

Sukuk in Pakistan

Pakistan uses sukuk at several levels:

• Government sukuk: the federal government issues ijara-based sukuk, mainly through auctions conducted by the State Bank of Pakistan. Banks are the main buyers.
• Corporate sukuk: some companies and public-sector bodies raise funds through sukuk, and some of these are listed on the Pakistan Stock Exchange.
• Retail access: individuals usually reach sukuk through Islamic mutual funds, Islamic bank products, or a broker account for listed issues. See PSX basics.

The supervisor of the securities market is Securities and Exchange Commission of Pakistan (SECP), with trading in listed securities and commodities only via SECP-licensed securities and futures brokers. Before you open an account with a broker, check that it is licensed. Our page on law and regulators explains how.

Sukuk returns in Pakistan are often set with reference to market rates. Those rates move with the central bank's policy decisions. The latest decision we have recorded is: SBP policy rate raised by 50 bps to 12% with effect from 27.10.2026 (MPC). Background is on SBP rates and economy.

Risks to understand

Sukuk are not risk-free, and Shariah approval does not remove financial risk:

• Credit risk: if the originator cannot pay, holders may face delays or losses. This is true even where the structure looks asset-backed.
• Price risk: the market price of a tradable sukuk can fall when market rates rise.
• Liquidity risk: many sukuk trade rarely, so selling before maturity can be hard or costly.
• Asset and legal risk: in a default, holders' real rights over the assets depend on the documents and on local law.

Sukuk are different from leveraged products such as forex or CFDs. Leveraged CFD trading can lose money fast and is a separate topic, covered on our Islamic finance and trading page.

For other savings options, see Saving, investing and loans and Islamic vs conventional banking.

Frequently asked questions

What is the difference between sukuk and a bond?

A bond is a loan that pays interest. A sukuk gives a share in assets or a contract, and the return comes from rent, sale profit or business profit.

Are all sukuk accepted as halal?

No. Most scholars accept sukuk in principle, but they differ on specific structures. The main points of disagreement are repurchase at face value, debt-based pools and interest-linked pricing. Read the issue's Shariah pronouncement and consult a scholar you trust.

Is the sukuk return fixed?

It depends on the structure. Ijara sukuk often pay a rent set in advance or linked to a benchmark. Mudaraba and musharaka sukuk depend on actual profit.

Can an individual in Pakistan buy sukuk?

Usually only indirectly, through Islamic mutual funds or bank products, or directly for listed issues through an SECP-licensed broker. Check the current conditions with the provider.

Is zakat due on sukuk?

Scholars generally treat sukuk holdings as zakatable wealth. How to value them, and the effect of any deduction at source, is explained on Zakat on investments.

Are prize bonds a type of sukuk?

No. Prize bonds and National Savings products are separate instruments. See Savings and deposits.