Ijarah Sukuk explained: The most widely used Sukuk structure

In-Depth Analysis

Among all Sukuk structures, Ijarah Sukuk are the most widely used and best understood. Their popularity stems from the simplicity and clarity of the underlying contract — Ijarah (lease) — which provides a straightforward mechanism for generating periodic returns from an identified tangible asset. In an Ijarah Sukuk structure, the originator (typically a government or corporation needing to raise capital) identifies an asset — often real estate, aircraft, ships, or infrastructure — and sells it to a Special Purpose Vehicle (SPV). The SPV finances this purchase by issuing Sukuk certificates to investors. The SPV then leases the asset back to the originator, who continues to use it and pays periodic rental payments. These rental payments are distributed to the Sukuk holders as their return on investment. At maturity, the originator repurchases the asset from the SPV at a predetermined price, and the proceeds are used to repay the principal to the Sukuk holders. The Shariah logic of this structure is clear. The Sukuk holders, through the SPV, genuinely own the asset. Their return (rental income) is compensation for the use of their property, not interest on a loan. The asset-backing is real and identifiable, which satisfies the Islamic requirement for transactions to involve tangible economic activity. The rental rate in an Ijarah Sukuk is typically benchmarked to a reference rate such as LIBOR (now transitioning to SOFR and other risk-free rates) plus a margin. While this superficially resembles a floating-rate bond coupon, Shariah scholars have accepted this practice on the grounds that the benchmark is used merely as a pricing mechanism for the rental — the underlying nature of the payment remains a lease payment, not interest. This is an important distinction and one that is frequently debated. One of the key advantages of Ijarah Sukuk from a Shariah trading perspective is that they are freely tradable on the secondary market. Because the underlying asset is a tangible property (not a debt receivable), selling the Sukuk certificate is equivalent to selling a proportionate share of a real asset, which is permissible. This gives Ijarah Sukuk superior liquidity compared to debt-based Sukuk structures like Murabahah.