Sukuk — Global Islamic Capital Markets

In Lessons 4 and 5, you worked through murabaha and ijarah at the individual transaction level — a bank and a customer. Sukuk operates at a different scale. These are capital market instruments traded globally, issued by sovereigns and corporations, held by investors across multiple jurisdictions, and subject to accounting analysis from both the issuer's and investor's perspectives simultaneously.

Global sukuk issuance reached approximately $200 billion in 2024. Malaysia is the world's largest single issuer market, accounting for approximately 35-40% of global volume. Saudi Arabia, the UAE, Indonesia, and Pakistan are major sovereign issuers. The London Stock Exchange lists sukuk from multiple jurisdictions. Green sukuk — combining Islamic finance's asset-backed principles with the global sustainability movement — grew by 17% in Q1 2024.

Sukuk Structures

A sukuk is not a bond. A bond is a debt obligation — the issuer borrows money and promises to repay with interest. A sukuk represents certificates of ownership in underlying assets, with returns generated by those assets.

Sukuk Type	Underlying Structure	Returns Based On	SPPI Test Result
Ijarah (most common)	Sale-and-leaseback of assets	Rental income from leased assets	Typically PASSES
Musharakah	Joint venture / partnership	Venture profit (variable)	FAILS — equity-linked
Mudarabah	Profit-sharing investment	Investment profit (variable)	FAILS — equity-linked
Wakala	Agency investment management	Agent-managed portfolio returns	Depends on structure
Murabaha	Portfolio of receivables	Receivable collections	Shariah tradability restriction

Ijarah Sukuk — The Most Common Structure

The ijarah sukuk structure works as follows:

1. Originator (e.g., a government or corporation) sells assets to an SPV (sukuk trustee)
2. SPV issues sukuk certificates to investors. Investors pay face value to SPV
3. SPV leases assets back to originator. Rental payments = sukuk distributions
4. At maturity, originator repurchases assets from SPV (purchase undertaking)

The periodic distributions to investors are rental payments, not interest. The repurchase at maturity is a purchase, not a principal repayment. The Shariah form is clear. The accounting analysis, however, depends on whether the substance matches the form.

The Issuer's Two Critical Accounting Questions

Question 1: Does the Issuer Derecognise the Underlying Assets?

The issuer sold assets to the SPV. Under IFRS 9 derecognition criteria: has the issuer transferred substantially all the risks and rewards of the assets?

The answer almost always is no, because of the purchase undertaking. If the issuer promises to repurchase the assets at face value at maturity — regardless of the assets' current market value — the issuer still bears the value risk. The risks and rewards have not been transferred.

Result: Failed derecognition. Assets stay on the issuer's balance sheet. Sukuk proceeds are recognised as a financial liability.

Question 2: Is the Sukuk a Financial Liability or Equity (IAS 32)?

If the issuer has contractual obligations to:

• Pay periodic cash distributions (rental) — this creates a financial liability component
• Repay face value at maturity (purchase undertaking) — this creates a financial liability

IAS 32 conclusion for most ijarah sukuk: Financial liability. Because there is a contractual obligation to deliver cash.

Issuer journal entry at issuance: Dr: Cash | Sukuk proceeds Cr: Sukuk Payable / Islamic Financing Liabilities | Face value

Assets remain on balance sheet — no derecognition entry.

The Investor's Classification — The SPPI Test

For investors holding sukuk, IFRS 9 requires a two-step classification.

Step 1: Business Model Test

• Held-to-collect (HTC): If SPPI also passes → Amortised Cost
• Held-to-collect-and-sell (HTCS): If SPPI passes → FVOCI
• Other (trading): FVTPL regardless of SPPI

Step 2: The SPPI Test

Do the cash flows represent solely payments of principal and a return consistent with a basic lending arrangement?

Ijarah sukuk — SPPI typically PASSES:

• Fixed periodic distributions (rental) = return consistent with lending
• Fixed maturity redemption (purchase undertaking) = principal repayment
• The purchase undertaking fixes the repayment amount — economically similar to a loan

Musharakah / mudarabah sukuk — SPPI FAILS:

• Returns depend on venture profit — not solely principal and return
• Variable, equity-linked cash flows → FVTPL classification

This distinction matters enormously. An ijarah sukuk held to collect can be measured at amortised cost — stable carrying value, no mark-to-market volatility. A musharakah sukuk must be measured at FVTPL — fair value changes hit the income statement every period.

AAOIFI FAS 25 — Investor Classification (Bahrain, Qatar)

AAOIFI FAS 25 uses a different classification system:

AAOIFI FAS 25 Category	Similar IFRS 9 Category	Measurement
Held-to-maturity	Amortised Cost	Amortised cost
Trading	FVTPL	Fair value through P&L
Available-for-sale	FVOCI	Fair value through OCI

Income labels under AAOIFI FAS 25: "Income from Sukuk Investments" or "Return on Sukuk" — never "Interest Income."

AAOIFI Draft Standard 62 — The Industry's Most Watched Proposal

Draft Standard 62 proposes shifting sukuk from asset-based to asset-backed:

Current (Asset-Based)	Proposed (Asset-Backed)
Sukuk = unsecured claim on originator's creditworthiness	Sukuk = secured claim on specific assets
Investors have recourse to originator if assets fail	Investors have recourse ONLY to the transferred assets
Most current sukuk structures	Would require restructuring most existing sukuk

If adopted, originators would need to genuinely transfer assets (true sale), and investors would have no recourse to the originator beyond the asset pool. This would fundamentally restructure the global sukuk market.

The Purchase Undertaking Controversy

The purchase undertaking is the most contested issue in global sukuk accounting and Shariah compliance:

• IFRS perspective: A fixed-price purchase undertaking makes the sukuk economically equivalent to a bond — the investor gets back face value regardless of asset performance
• Shariah perspective: AAOIFI Shariah Standard 17 (Investment Sukuk) and the AAOIFI 2008 Shariah resolution on sukuk permit purchase undertakings for ijarah sukuk but prohibit them for equity-based sukuk (musharakah, mudarabah) because guaranteeing capital return in a profit-sharing arrangement violates the risk-sharing principle
• Standard 62 risk: If adopted, purchase undertakings in their current form may not satisfy the asset-backed requirement

Exercise Requirements

Plugin: Islamic Finance Domain Agents (install once — see Lesson 3) Exercise data: Download islamic-finance-exercise-data.zip and find exercises/ex03-gcc-sukuk-issuance.md

Practice Exercise 3: GCC Sukuk Issuance — Multi-Jurisdiction Accounting

What you will build: Issuer derecognition analysis, investor classification across three jurisdictions, and a Draft Standard 62 risk assessment.

Requirements: Cowork or Claude (any plan). 60 minutes.

Scenario: A UAE energy company issues a $500 million 5-year ijarah sukuk. Underlying assets: power generation infrastructure leased back to the company. Distribution rate: 5.25% per annum semi-annual. The company provides a purchase undertaking at face value. Listed on Nasdaq Dubai and London Stock Exchange.

1. UAE issuer accounting (IFRS). Tell your AI assistant: "Jurisdiction: UAE. Framework: IFRS. I am the issuer. Account for the sukuk issuance: (1) Does the issuer derecognise the underlying power assets transferred to the SPV? Apply the IFRS 9 derecognition criteria — note the impact of the purchase undertaking at face value. (2) Classify the sukuk under IAS 32: financial liability or equity? (3) Generate the journal entry for initial recognition."

2. Bahrain investor accounting (AAOIFI FAS 25). Tell your AI assistant: "Jurisdiction: Bahrain. Framework: AAOIFI FAS 25. An investor holds $50M. Classify under AAOIFI FAS 25. Generate: (1) Journal entry for initial recognition; (2) Semi-annual income recognition entry; (3) Year-end measurement entry."

3. Malaysia investor accounting (MFRS 9). Tell your AI assistant: "Jurisdiction: Malaysia. Framework: MFRS 9. An investor holds MYR 80M. Apply the SPPI test: do the cash flows represent solely principal and return? Note the purchase undertaking impact on SPPI. Conclude: amortised cost, FVOCI, or FVTPL? Justify."

4. UK investor accounting (IFRS 9). Tell your AI assistant: "Jurisdiction: UK. Framework: IFRS 9. An investor holds $25M. Apply the same SPPI test. Does the fact that the sukuk is listed on the LSE change any aspect of the accounting? Generate IFRS 9 journal entries for initial recognition and first semi-annual distribution."

5. Comparison and Standard 62 analysis. Ask: "Produce a comparison table: Bahrain (AAOIFI FAS 25), Malaysia (MFRS 9), and UK (IFRS 9) investor accounting for this sukuk. For each: (1) Measurement basis; (2) Income label; (3) Balance sheet classification; (4) Impairment approach. Then: Is the purchase undertaking at face value a Shariah compliance concern? If Draft Standard 62 were adopted, would this sukuk pass the asset-backed test? What structural change would be required?"

6. Error detection — misclassified sukuk. Review this deliberately incorrect output and identify the errors: "A Bahrain investor classified an ijarah sukuk at FVTPL and labelled the income 'Interest Income from Sukuk'. The balance sheet shows it under 'Trading Securities'. Identify all classification and labelling errors for a Bahrain entity under AAOIFI FAS 25. What should each line item be?"

Check your work: In Step 1, the derecognition analysis should conclude that assets remain on the issuer's balance sheet (failed derecognition due to purchase undertaking). The sukuk should be classified as a financial liability under IAS 32. In Steps 2-4, the ijarah sukuk should pass the SPPI test and be eligible for amortised cost classification. The comparison table in Step 5 should show similar measurement but different labels and disclosure requirements. In Step 6, the errors are: "Interest Income" is prohibited (should be "Sukuk Income" or "Ijarah Income"), FVTPL is wrong for an ijarah sukuk that passes the SPPI test (should be amortised cost), and "Trading Securities" is not an AAOIFI balance sheet classification for sukuk investments.

Global Perspective

The sukuk market bridges Islamic and conventional capital markets. European pension funds buy Malaysian government sukuk. UK fund managers hold GCC corporate sukuk. The same instrument is classified under AAOIFI FAS 25 in Bahrain, MFRS 9 in Malaysia, and IFRS 9 in London — three different classification frameworks for the same certificate. The CA/CPA who can navigate all three frameworks simultaneously occupies a practice niche with very few competitors globally.

Try With AI

Use these prompts in Cowork or your preferred AI assistant to explore this lesson's concepts.

Prompt 1: SPPI Test Comparison Across Sukuk Types

Apply the IFRS 9 SPPI test to three different sukuk structures:

Sukuk A: Ijarah sukuk. Fixed semi-annual distribution of 5%.
Purchase undertaking at face value at maturity.

Sukuk B: Musharakah sukuk. Distributions based on quarterly
venture profit. No purchase undertaking — investors bear
capital risk.

Sukuk C: Wakala sukuk. Agent manages a diversified asset pool.
Target return of 4.5% but actual return depends on portfolio
performance. Partial capital protection through reserve account.

For each sukuk:
1. Does it pass the SPPI test? Why or why not?
2. What is the IFRS 9 classification?
3. How is periodic income measured and recognised?
4. What happens to fair value changes — P&L or OCI?
5. What is the ECL impairment approach?

Present the results in a comparison table.

What you are learning: The SPPI test is the gateway to sukuk classification. Understanding which structures pass and which fail determines whether investors report stable amortised cost balances or volatile fair value changes. The wakala sukuk (Sukuk C) is the most interesting — the partial capital protection and target return create a genuinely ambiguous SPPI analysis that requires professional judgment.

Prompt 2: Green Sukuk Advisory

A Malaysian corporation wants to issue a MYR 2 billion green
sukuk to finance solar energy infrastructure. The sukuk will
be structured as ijarah (sale-and-leaseback of solar panels).

Advisory questions:
1. What additional requirements does the Securities Commission
   Malaysia SRI Sukuk Framework impose beyond standard sukuk?
2. What ongoing reporting obligations apply — use of proceeds,
   impact reporting?
3. Does the "green" designation change any aspect of the
   MFRS 9 accounting for the issuer or investor?
4. Draft the Use of Proceeds section for the offering circular
5. How does green sukuk combine Islamic finance's asset-backed
   principles with the global ESG movement? Is this a natural
   convergence or a marketing exercise?

Structure your response as an advisory memo suitable for
the issuer's board of directors.

What you are learning: Green sukuk represent the convergence of Islamic finance and sustainable finance — two movements with natural alignment (both require asset-backing, ethical screening, and real economic activity). The accounting treatment is unchanged, but the disclosure and reporting obligations are significantly expanded. This is one of the fastest-growing segments of the global sukuk market and a high-value advisory niche.

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