Government-issued and corporate Ijarah Sukuk: Real-world applications

In-Depth Analysis

The Ijarah Sukuk structure has been adopted by both sovereign issuers and corporations across the globe. Its versatility and Shariah clarity make it the preferred structure for many debut issuers entering the Sukuk market for the first time. Sovereign Ijarah Sukuk are issued by governments to raise funds for national budgets, infrastructure development, or refinancing existing obligations. The typical sovereign Ijarah Sukuk involves the government identifying state-owned assets — often government buildings, land parcels, or infrastructure — and selling them to an SPV, which issues the Sukuk. The government then leases the assets back. Malaysia was a pioneer in this space, with its Government Investment Issues (GII) serving as the benchmark for the ringgit Sukuk market. Indonesia has also been a prolific sovereign Sukuk issuer, using state assets including government-owned land and buildings to back its issuances. In the corporate sector, Ijarah Sukuk have been used by airlines to finance aircraft acquisition (with the aircraft serving as the underlying asset), by real estate developers to monetize property portfolios, by telecommunications companies to securitize tower networks, and by utilities to raise funds against infrastructure assets. The GCC countries have seen particularly active corporate Sukuk issuance, with entities in Saudi Arabia, UAE, and Qatar regularly tapping the market. A notable feature of sovereign Ijarah Sukuk is that they often serve a monetary policy function. Central banks and monetary authorities in countries like Malaysia, Bahrain, and Sudan use short-term sovereign Sukuk as a liquidity management tool, equivalent to Treasury bills in conventional finance. These instruments allow Islamic banks to park their excess liquidity in Shariah-compliant instruments and earn a return, addressing one of the long-standing challenges in Islamic banking — the lack of short-term liquid instruments for reserve management. The success of Ijarah Sukuk at the sovereign level has also helped establish Sukuk yield curves in several markets, which in turn facilitates pricing for corporate issuances. Malaysia has the most developed Sukuk yield curve, followed by Saudi Arabia and Indonesia. These yield curves are essential for the efficient functioning of Islamic capital markets, as they provide reference points for pricing new issuances across different maturities.