islamic finance sukuk — OpenTuition Forums

RRoy7y ago

hello john i am having a real difficulty in understanding sukuk. can you please explain me this concept in layman terms? lets say a company needs money to expand its business, it wants to buy an advanced ice creme making machinery. traditionally it could raise funds from corporate bond where the buyer would lend money and earn interest and gets repaid at maturity however in sukuk as far i have understood the company will get the money from investor and buys an asset and investor will get compensated from the rent from that asset but where will the funds come then for the ice creme machinery that the company wanted to buy? how does sukuk help this company. please explain

John MoffatTutor7y ago#1

They can work in different ways, but essentially it is just like raising debt finance and using it to buy the machine. However whereas if the money came from conventional bonds then the company would have to pay out interest (which is not allowed under Islamic finance), with a sukuk the money comes from investors but the company effectively pays them rent for using the machine (rather than paying them interest).

RRoy7y ago#2

thanks john so essentially the investors get ownership share of the machine as well and when the company incur a loss (lets say bad ice creme sales) then the investors wont get their rent and share the loss. is that right

John MoffatTutor7y ago#3

That is correct :-)

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