Sukuk trust certificates are key elements in Islamic finance. These certificates of equal value are undivided shares and represent tangible assets, services and other investment activity.

There are some similarities between sukuk and traditional bonds found in other financial systems, however the major difference - according to the principles of Shariah finance - is that they are backed by assets, rather than currency. Sukuk holders can earn profits based on this asset's performance, and these are paid in proportion to their ownership of the sukuk.

Because Islamic finance does not endorse risky investments, which are viewed as a form of gambling, sukuk holders can repurchase the underlying assets as a means of avoiding any potential losses that may occur. This can make sukuk trust certificates a more financially secure means of investing.

The first sukuk was issued in 2001 by the Central Bank of Bahrain, making the certificates a relatively recent phenomenon - however, it did not take long for sukuk to become widely used throughout the Islamic and non-Muslim world. Today, sukuk transactions account for around 10 per cent of all global Islamic finance assets, with their worth exceeding 1000 billion US dollars. This also makes them one of the most appealing instruments in Shariah finance, with considerable growth potential.

If you're interested in getting started with sukuk transactions, you should be aware that there are fundamentally two types of certificates - asset-backed sukuk and asset-based sukuk. The former holds the closest link between the originator of the assets and the special purpose vehicle issuing the sukuk, representing a true sale, which also means sukuk holders do not have recourse to the originators. The majority of sukuk transactions are asset-based however, and their variable cost is based on the changing price of assets over time.

In Western financial terms, asset-backed sukuk could be classified as being closer to equity than debt, due to sukuk holders owning their underlying assets. By contrast, asset-based sukuk may be viewed as being closer to debt, as holders do not have recourse to the originator. Because the legal structure of sukuk transactions is still undergoing development and revision, debts will usually be treated in accordance with the secular law in relevant countries - although Islamic finance must comply with Islamic law, governance ultimately falls to the state.

Sukuk can be combined effectively with other types of Shariah finance, including ijira, mudaraba, musharaka and salam contracts.

The author of this article is a part of a digital blogging team who work with brands like Fidomes. The content contained in this article is for information purposes only and should not be used to make any financial decisions.