Sukuk are often called Islamic bonds. That name is useful, but it can also hide the most important part of the deal.
A bond says, “I lent money to this issuer.” A sukuk says, “I hold an interest in assets, rights or an investment activity.”
That sounds like a big difference. Sometimes it is. Sometimes the cash flow and credit risk still look very close to a normal bond.
My rule is simple. Do not stop at the word sukuk. Find out what the certificate represents, who promises to pay, what happens if payments stop and whether you can sell before maturity.
What is sukuk?
Sukuk is the plural of the Arabic word sakk. It means a certificate or legal document.
In modern finance, sukuk are certificates of equal value that represent shares in assets, rights, services, projects or an investment activity. This idea comes from the AAOIFI definition and is also used by the IMF.
The reason for this structure is clear. Islamic finance does not allow riba, commonly understood as interest on a loan. A normal bond starts with debt and interest. Sukuk use a sale, lease, agency, partnership or another approved contract to create the investor return.
That return may come from rent, trading profit or income earned by an investment pool.
In the real market, many sukuk are designed to give investors regular payments and a set maturity date. This makes them feel familiar to bond investors. It does not make every sukuk the same as every bond.
Sukuk vs bonds
Here is the cleanest comparison I can make.
| Question | Sukuk | Conventional bond |
|---|---|---|
| What does the investor hold? | A certificate linked to assets, rights or an investment activity | A debt claim against the issuer |
| Why is income paid? | Rent, trading profit, agency income or partnership profit | Interest or a return built into the debt terms |
| Is an asset needed? | Yes, the structure needs eligible assets, rights or activity | No specific asset is needed unless the bond is secured |
| Who checks the structure? | Lawyers, arrangers and a Sharia board or adviser | Lawyers, arrangers and market regulators |
| What drives credit risk? | Often the obligor, but sometimes the asset pool | The issuer and any security or guarantee |
| What happens in default? | It depends on the sale, purchase promise, security and governing law | It depends on seniority, security, guarantees and insolvency law |
| Can it trade? | Often yes, but some structures face Sharia trading limits | Usually yes if a market exists |
Both can have a fixed payment schedule. Both can be rated. Both can rise or fall when market rates change. Both can default.
The difference is not that sukuk are safe and bonds are risky. The difference is how the deal creates the payment and what legal rights sit under it.
How sukuk works
A simple ijara sukuk can work like this.
- A company or government identifies an asset that can be leased.
- A special company is created to issue the sukuk certificates.
- Investors pay cash for the certificates.
- The special company uses the money to acquire an interest in the asset.
- The asset is leased and rent is paid.
- That rent funds the regular payments to investors.
- At maturity, the asset interest is sold back under the agreed documents and investors are repaid.
This is the clean picture. Real documents can be much more detailed.
The special company is often called an SPV. It sits between the investors and the company or government raising the money. The SPV issues the certificates and holds the transaction rights for investors.
One question matters above all: did the asset truly leave the original owner, or is the asset mainly there to make the financing structure work?
That is the line between asset backed and asset based sukuk.
Main sukuk structures
You do not need to learn every Arabic term. These are the main ones worth knowing.
| Structure | What happens | Where the investor return comes from |
|---|---|---|
| Ijara | An asset or right is leased | Rent |
| Wakala | An agent manages a pool of approved investments | Income from the pool |
| Murabaha | An asset or commodity is sold at cost plus a known profit | Payments under the sale |
| Mudaraba | Investors provide capital and a manager runs the activity | An agreed share of profit |
| Musharaka | The parties invest together in a venture or asset | An agreed share of profit |
| Hybrid | More than one structure is combined | A mix of approved income sources |
Ijara is easy to picture because rent is easy to see. Wakala is flexible because it can use a pool of assets. Murabaha creates receivables, so trading can be more limited under Sharia rules. Partnership structures can bring more direct business risk.
The label does not give you the full risk. A wakala sukuk can be very strong or very weak. An ijara sukuk can still leave you relying mainly on the credit of the obligor.
Asset based vs asset backed
This is the part I would read twice.
Asset backed sukuk
An asset backed deal uses a true sale. The asset pool is moved to the SPV in a way that is meant to stand even if the original owner fails.
The investors rely on the asset cash flow and may have the right to use or sell the assets after a default. Their risk is tied more directly to the value and performance of those assets.
Asset based sukuk
An asset based deal links the certificates to assets, but the investor often relies mainly on promises from the obligor. A purchase undertaking may require the obligor to buy the rights back at maturity or after a default.
If the obligor fails, the investors may rank much like unsecured creditors. They may not be able to take and sell the building, land or other asset named in the structure.
The World Bank says most current sukuk transactions are asset based. The IMF made the same point in its work on investor protection.
So the phrase “you own part of an asset” needs care. A sukuk certificate can represent an ownership interest for the structure while giving the holder little direct control over the asset in a real default.
Before I judge any sukuk, I want answers to four questions.
- Was there a true legal sale?
- Who holds legal title?
- Can the assets be pulled back into the seller’s insolvency estate?
- Does the investor claim run to the assets or mainly to the obligor?
Sukuk market size in 2026
The market is now too large to call a niche.
Fitch said global sukuk outstanding moved above $1 trillion at the end of 2025. It counted more than $300 billion of issuance during 2025, up about 25 percent from the year before.
S&P uses a different market measure. It counted $264.8 billion of issuance in 2025, up from $234.9 billion in 2024. It then recorded $129 billion in the first half of 2026 and kept a full year forecast of $270 billion to $280 billion.
| Source and measure | Figure |
|---|---|
| Fitch 2025 global issuance, all currencies | Above $300 billion |
| Fitch outstanding at the end of 2025 | Above $1 trillion |
| S&P 2025 global issuance | $264.8 billion |
| S&P first half 2026 issuance | $129 billion |
| S&P full year 2026 forecast | $270 billion to $280 billion |
Do not add these figures together. The firms do not count the market in exactly the same way.
The GCC is central to this market. Fitch said sukuk made up 41 percent of all outstanding GCC debt capital markets at the end of 2025. That does not mean the GCC held 41 percent of global sukuk. These are two different claims.
The credit profile is also stronger than many people expect. Fitch said 82.5 percent of the sukuk it rated were investment grade at the start of 2026. Its July update put the share at just over 80 percent and said there had been no Fitch rated sukuk defaults since 2021.
That does not make the whole market safe. Fitch rates only part of it, and an investment grade rating is not a promise that an investor cannot lose money.
Sukuk market timeline
1990
Shell MDS in Malaysia raised RM125 million through Islamic securities. Securities Commission Malaysia describes this as the first sukuk issue in Malaysia and an early market first.
2001
The Bahrain Monetary Agency issued a $100 million Islamic leasing sukuk for the government. Its annual report described the agency as the first central bank to issue Islamic bonds internationally.
2002
Malaysia issued a $600 million deal that its Securities Commission describes as the first global sovereign sukuk.
The wording matters. Bahrain was an early international central bank issue in 2001. Malaysia’s 2002 deal is commonly treated as the first global sovereign benchmark.
2007 and 2008
Taqi Usmani, then head of the AAOIFI Sharia board, criticised partnership sukuk that protected investor capital through a promise to buy assets back at their original price.
The claim is often repeated as 85 percent of sukuk being noncompliant. In his own later account, Usmani says he told Reuters that 80 percent of market sukuk were not Sharia compliant. I use his own number.
His point was not that every sukuk was forbidden. His point was that some structures copied the economic result of debt while removing the investment risk that partnership contracts were meant to carry.
2017
Dana Gas challenged the enforceability of parts of its mudaraba sukuk structure. The English High Court held that the English law purchase undertaking was valid and enforceable. The court did not decide that the whole structure was valid under every law or settle a general religious question.
2023 to 2026
AAOIFI published draft Sharia Standard 62 on sukuk and received strong market feedback. In April 2025, AAOIFI said the standard was still a draft and was being changed. As of July 2026, it is still not final. AAOIFI’s published Sharia standards run from 1 to 61.
2025
Fitch said the outstanding market passed $1 trillion for the first time.
2026
Khazanah priced Malaysia’s first tokenised sukuk pilot, a RM100 million issue under its Sukuk Danum programme. Securities Commission Malaysia described the token as a secure digital record or digital twin of the capital market product.
Dana Gas lesson
Dana Gas is often reduced to one line: the company said its own sukuk was no longer Sharia compliant.
The real lesson is more useful.
The mudaraba agreement was governed by UAE law. The purchase undertaking was governed by English law. Dana Gas argued that the purchase promise should not be enforced if the underlying UAE agreements were invalid.
For the question before it, the English High Court assumed the UAE law points in Dana Gas’s favour. It still held that the English law purchase undertaking was valid and enforceable.
This tells me three things.
First, a Sharia opinion and a court ruling are not the same thing.
Second, one sukuk can have documents governed by different laws.
Third, the payment promise can matter more to recovery than the asset story in the sales pitch.
Dana Gas does not prove that all sukuk are weak. It proves that investors should read the governing law, purchase undertaking, default terms and asset transfer before assuming what they own.
How to invest in sukuk
There are four common routes.
| Route | What it gives you | What to check |
|---|---|---|
| Sukuk ETF | A listed basket that trades like a share | Fee, index, currency, duration, spread and exchange access |
| Sukuk mutual fund | A managed pool of sukuk | Fee, dealing time, minimum, manager and share class |
| Managed portfolio | A portfolio chosen for your account | Advice fee, custody, mandate and position size |
| Direct sukuk | Exposure to one exact issuer and maturity | Minimum size, credit, price, yield, liquidity and documents |
For most individual investors, a fund is the easier route. It spreads the money across several issues and removes the need to settle each sukuk directly.
Direct sukuk can be harder. Many international issues are built for institutions. The minimum face value and trading increment can be large. The exact number varies, so I would never assume a standard minimum.
A broker or private bank may show a bond as available while offering very little real liquidity. Check the buy price and the price at which the same platform would buy it back.
Sukuk ETFs
Two current examples show how access can differ by market.
| Fund | Main market | What it follows | Stated annual fund fee |
|---|---|---|---|
| SP Funds Dow Jones Global Sukuk ETF, SPSK | United States | Dow Jones Sukuk Total Return Index | 0.50 percent |
| iShares dollar Sukuk UCITS ETF, SKUK | Selected European and international markets | J.P. Morgan EM Aggregate Sukuk Index | 0.40 percent |
The iShares fund is based in Ireland and distributes income each quarter. Its official page listed 219 holdings on 7 July 2026. The fund is open to investors of any religion where local access rules allow it.
An ETF solves the access problem. It does not remove the investment risks.
The price can fall when market yields rise. The portfolio can be concentrated in Gulf and emerging market issuers. The trading price can move away from the value of the holdings for short periods. Tax, currency conversion and broker fees can also change the result.
I would check the latest fund page before buying. Holdings, yield, duration, assets and spreads change over time.
Main sukuk risks
Credit risk
The company or government behind the payments may fail. A sukuk rating can often track the obligor rating because many issues are asset based.
Market rate risk
Sukuk prices can fall when market yields rise. A longer maturity usually moves more than a short maturity.
Liquidity risk
Some sukuk trade rarely after issue. A price on a screen does not promise that a buyer will take your full position at that price.
Ownership and recourse risk
The asset named in the structure may not be available for investors to seize or sell. A true sale, legal title and insolvency protection matter.
Sharia risk
Scholars and standards can differ. A structure approved at issue may later be questioned. That can hurt price, refinancing and legal certainty.
Governing law risk
Different documents can use different legal systems. A right that looks clear in one contract may still require action in another country.
Currency risk
Many global sukuk are issued in dollars, but funds and investors can use another home currency. Local currency sukuk add another layer of currency movement.
Call and loss risk
Bank capital sukuk can be perpetual, callable and able to absorb losses under their terms. They are not the same as a normal senior five year sukuk.
Fund risk
An ETF adds management fees, custody, index rules, trading spreads and tracking differences. It can also hold a mix of countries and structures that an investor would not choose one by one.
What to watch next
I am watching three things.
The first is AAOIFI Standard 62. The draft tries to bring sukuk closer to real ownership and clearer asset transfer. That could improve trust, but it could also make some issues harder or more costly to build. Until AAOIFI publishes a final standard, nobody should write as if the rule is settled.
The second is the split between local and foreign currency issuance. S&P says local currency markets drove the growth in the first half of 2026. That tells us domestic banks and institutions still do much of the work.
The third is tokenization. Malaysia’s 2026 Khazanah pilot shows that a sukuk can have a digital twin on distributed ledger technology. That can improve records and settlement. It does not change who owes the money or remove default risk.
This connects directly with my guide to Dubai real estate tokenization. In both markets, a token is only the wrapper. The legal right under the token is what matters.
My view
I do not see sukuk as fake bonds. I also do not see every sukuk as true ownership of a hard asset.
I see a market with two ideas living together.
The first idea is practical funding. Governments, banks and companies raise money in a form that can meet Sharia rules and reach a large pool of investors. This market works, and it is now above $1 trillion.
The second idea is deeper. It asks whether investors can share real asset and business risk instead of only lending against a promise. That part is still being tested through Standard 62 and the debate over true ownership.
For an investor, the answer is not in the Arabic name of the contract. It is in the documents.
Who owes the money? What do I own? What can I claim? How can I exit?
If I can answer those four questions, I understand the sukuk. If I cannot, the headline yield is not enough.
This page is for information only. It is not investment, legal, tax or religious advice.
Update log
Monthly updates
Initial guide checked against official and market records
I checked the 2025 and 2026 market totals, the Shell and Bahrain first issues, the Dana Gas court ruling, the current ETF options and the status of AAOIFI Standard 62. I corrected two common errors. The GCC figure is a share of GCC debt markets, not a share of global sukuk. Taqi Usmani says in his own account that he used 80 percent, not the widely repeated 85 percent.
Clear answers
Frequently asked questions
What is sukuk in simple terms?
A sukuk is an investment certificate built around assets, rights or a Sharia compliant business activity. It can pay regular income and return money at maturity, much like a bond. The legal form and source of the payment are different from a normal interest bearing loan.
What does sukuk mean?
Sukuk is the plural of the Arabic word sakk, which means a certificate or legal document. In finance, the word is used for Sharia compliant investment certificates.
What is the difference between sukuk and bonds?
A conventional bond gives the investor a debt claim against the issuer. A sukuk certificate represents an interest in assets, rights or an investment activity. Many sukuk still depend mainly on the credit of the company or government that promises to make the payments, so the documents matter more than the label.
Do sukuk pay interest?
Sukuk do not describe their return as interest. Payments can come from rent, trading profit, agency investments or partnership profit. In many large issues, the payment schedule is designed to look similar to a bond coupon.
Are sukuk safer than bonds?
Not automatically. Both can lose money through default, market rate moves, currency changes and weak liquidity. A sukuk can also carry added risks from its structure, governing law and Sharia review. Safety depends on the exact issue.
Can non Muslims invest in sukuk?
Yes. Sukuk are not limited by the religion of the buyer. Access depends on the product, the investor location, the broker and local rules.
Is there a sukuk ETF?
Yes. SPSK is a United States listed sukuk ETF. The iShares dollar Sukuk UCITS ETF, commonly shown with the ticker SKUK, is an Ireland based fund for markets where that share class is available. Fees, access, tax and holdings should be checked before buying.
How can I invest in sukuk?
The common routes are a sukuk ETF, a sukuk mutual fund, a managed portfolio or a direct purchase through a broker or private bank. Direct issues can have large minimum sizes. The minimum and trading rules vary by security and platform.
Are sukuk asset backed?
Some are, but many are asset based. In an asset backed sukuk, a true sale can give investors recourse to a separate pool of assets. In an asset based sukuk, investors usually rely mainly on the credit and promises of the obligor. Read the sale, purchase and default terms.
Is AAOIFI Standard 62 final?
No. As of July 2026, AAOIFI Standard 62 on sukuk is still a draft. AAOIFI said it was revising the draft after industry feedback, and its published Sharia standards still run from 1 to 61.
Primary material
Sources
- Islamic Finance research and July 2026 sukuk market update S&P Global Ratings, 13 July 2026
- Global sukuk market enters 2026 with strong fundamentals Business Today, citing Fitch Ratings, 8 January 2026
- Global sukuk issuance recovery hinges on regional recovery Business Today, citing Fitch Ratings, 13 July 2026
- Record breaking international sukuk issuances hit $65.6 billion International Islamic Financial Market, 20 November 2025
- An overview of Islamic finance International Monetary Fund, June 2015
- Asset recycling through Islamic finance World Bank
- Press release on Draft Sharia Standard No. 62 AAOIFI, 28 April 2025
- Draft English translation of AAOIFI Sharia standards 1 to 61 AAOIFI, 13 January 2026
- Special keynote address at the London Sukuk Summit Securities Commission Malaysia, 2 July 2009
- Bahrain Monetary Agency Annual Report 2002 Central Bank of Bahrain, 2002
- Dana Gas PJSC v Dana Gas Sukuk Ltd and others, approved judgment High Court of Justice, England and Wales, 17 November 2017
- Memories, episode 57 Mufti Muhammad Taqi Usmani
- SP Funds Dow Jones Global Sukuk ETF SP Funds
- iShares dollar Sukuk UCITS ETF iShares, 7 July 2026
- Khazanah leads Malaysia first tokenised sukuk pilot Securities Commission Malaysia, 28 April 2026