Description

"Sukuk (Islamic bond or “Sharia-compliant” bond) is an Islamic financial certificate that represents a portion of ownership in a portfolio of eligible existing or future assets. They can be considered an Islamic version of conventional bonds. Sharia (Islamic law) prohibits lending with interest payments (riba), which is deemed usurious and exploitative. Thus, bonds are forbidden in Islamic finance. Upon its issuance, the issuer sells certificates to investors. Then, the issuer uses the proceeds from the certificates to purchase the asset, and investors receive partial ownership of the asset. The investors are also entitled to part of the profits generated by the investment.

Instrument category

Debt financing

Implementation status

Low - limited evidence available

Enabling conditions and success factors

• Clarity on standards and classifications of green assets is key.

Instrument benefits

• The risk-sharing aspect of Sukuk gives them a clear advantage as a funding instrument for infrastructure: nearly all conventional infrastructure projects contain individual equity and debt components, especially during the greenfield phase. This leads to a concentration of risk in the equity tranche and complex contracts. Furthermore, there is limited flexibility to handle unforeseen but common events such as delays in revenue generation. Sukuk are designed from the outset to spread the risk more broadly because all investors share in the same manner.
• Greater flexibility in issuing return on investment: Sukuk can also be used flexibly over time because payments are tied to underlying returns rather than fixed schedules.

Challenges and risks to implementation

• Project-based green Sukuk issuances are too closely linked with only renewable energy and green real estate projects
• The lack of a classification of green assets and projects by financial institutions prevents the pooling of green assets for green Sukuk issuances.

References

Case studies

Private sector green Sukuk in UAE to incentivise green commercial buildings