Md Imran Shikdar

The word ‘Sukuk’ refers to a financial instrument governed by Islamic Shariah law

Islamic Sukuk Bonds are a new investment vehicle for different categories of investors in Bangladesh.

The word ‘Sukuk’ refers to a financial instrument governed by Islamic Shariah law.

It’s different from a conventional investment as it prohibits interest (i.e., ‘riba’ in Arabic) and provides income in terms of shared profit.

Many developed markets have been utilizing sukuk bonds for financing because of its unique features and Bangladesh has now also begun launching products under this alternate investment tool so it is important for investors and issuers to understand how Sukuk works.

In 2020, Bangladesh Bank launched its maiden sukuk bond which will offer a fixed 4.69% rental yield per annum for a tenor of five years.

The rental yield provides the shared profit aspect that is one of the features of Sukuk that differentiates it from a conventional investment vehicle.

In this case, the rental yield derives from a project named "Safe Water Supply for the Whole Country."

Let’s look at how this works.

This Sukuk bond has three distinct parties – investors, borrower, and a third party who will connect these investors and the borrower.

So, while in a conventional bond, the investors will communicate directly with the borrower, in a Sukuk bond, both the investors and the borrower will communicate through a third party.

This third party will be termed as an SPV (Special Purpose Vehicle). In this case, the SPV will be Bangladesh Bank.

Bangladesh Bank will play a middleman role – it will collect the investment proceeds from the investors through issuing them electronic Sukuk certificates and then it will transfer these investment proceeds to the Government to develop and operate the project.

Before making this transfer, Bangladesh Bank will buy the project infrastructure from the Government on behalf of the investors.

Also, in this Sukuk structure, the borrower is called an originator who originates the project.

The originator, in this case, is the government of Bangladesh. 

To generate rental income from this project, Bangladesh Bank will now lease the project infrastructure back to the government through a lease agreement.

The government will thereafter use the project infrastructure under this lease agreement and will pay periodic rental yields to Bangladesh Bank.

Bangladesh Bank will then transfer these periodic rental yields to the investors.

This lease agreement will continue to be effective for 5 years.

After that, the government will buy back the project infrastructure from Bangladesh Bank through returning the investment proceeds and the lease agreement will terminate.

Bangladesh Bank will transfer back these investment proceeds to the investors and the associated Sukuk bond certificates will mature.

This bond will be backed by the full faith and credit of the government for the whole tenor, and so, this will be considered a ‘risk-free’ asset for the investors.

Although the overall sukuk bond structure looks a bit complicated, this type of structure appeals to both traditional commercial and Islamic shariah-compliant banks as it meets the banks’ Statutory Liquidity Ratio (SLR) requirements, and it fulfills the long-term risk-free investment needs of both traditional and Islamic (known as “takaful”) life insurance companies by providing a good asset liability match.

With over 50 commercial banks (including Islamic banks) and more than 30 life insurance and takaful companies in the country at present, sukuk offerings are likely to grow as they represent a good investment initiative to develop the Islamic bond market in the country.