Murabahah Sukuk explained: Cost-plus sale certificates and tradability constraints

In-Depth Analysis

Murabahah Sukuk are based on the Murabahah (cost-plus sale) contract, where the issuer purchases a commodity or asset and sells it to an end buyer at a marked-up price, with payment deferred. The Sukuk certificates represent the investors' ownership in the Murabahah receivable — the right to receive the deferred payment from the buyer. In a typical Murabahah Sukuk structure, the SPV uses the Sukuk proceeds to purchase a commodity (often a London Metal Exchange commodity like aluminum or copper in a Tawarruq arrangement), which is then sold to the originator at a cost-plus-profit price payable on a deferred basis. The profit element embedded in the sale price provides the return to Sukuk holders, distributed periodically or at maturity. The most significant limitation of Murabahah Sukuk is their restricted tradability. Once the Murabahah transaction is executed, the underlying asset has been delivered, and what remains is a receivable — a debt obligation. Under Shariah, trading debt at a discount or premium constitutes Riba. Therefore, Murabahah Sukuk can only be traded at face value (par) on the secondary market. This restriction severely limits their appeal to investors who require market liquidity and price discovery. Because of this tradability constraint, Murabahah Sukuk are used primarily for short-term liquidity management purposes. Islamic banks seeking to place excess funds in Shariah-compliant instruments for defined periods find Murabahah Sukuk suitable, as the buy-and-hold nature matches their liquidity management strategy. Many central banks and monetary authorities issue short-term Murabahah Sukuk specifically for this purpose. Another important application of Murabahah Sukuk is as a component of hybrid Sukuk structures. When combined with tangible asset-backed structures like Ijarah, Murabahah receivables can form a minority component of a diversified portfolio while the overall Sukuk maintains its tradability (provided the tangible asset portion exceeds the minimum threshold — typically 33% or 51% depending on the Shariah opinion applied). It is worth noting that Murabahah Sukuk are more prevalent in certain markets than others. Malaysia has historically been more permissive in its treatment of Murabahah Sukuk tradability, applying the principle that the Sukuk represents ownership in the underlying Murabahah arrangement (which includes the asset and the receivable) rather than just the receivable. This interpretation is not universally accepted, and the GCC market generally applies stricter tradability rules.