Embracing Sovereign Sukuk: Demystifying Sharia-Compliant Sovereign Finance
INTRODUCTION
Sovereign governments across Asia, Africa, the Middle East, and beyond are increasingly turning to sukuk, also known as “Islamic bonds,” to fulfill their financing needs. The sovereign sukuk marketplace reached a significant milestone, valued at $400 billion by the end of 2021. Despite this growth, sukuk remains relatively obscure when compared to conventional debt instruments, such as term loans and bonds.
Our discussion paper (1) provides a primer on how sovereign sukuk are structured and function; (2) analyzes how sukuk are priced and traded compared to conventional borrowing instruments; and (3) discusses how sukuk are likely to be treated if an issuing government seeks to restructure its debt.
KEY THEMES
We address several pivotal themes aimed at demystifying sukuk and understanding their increasing role within sovereign finance, including:
- Sovereign sukuk are currently the most predominant form of sukuk finance, comprising approximately $400 billion of the total sukuk market of $730 billion at the end of 2021.
- The cost to sovereigns of financing from sukuk is often lower than that of financing from conventional international sovereign bonds. This is especially so for sovereigns with lower credit ratings and higher borrowing costs, suggesting that such countries may have particular opportunities to tap sovereign sukuk for their financing needs.
- This “sukuk discount” does not stem from any de jure or de facto seniority to other obligations of the sovereign. Neither does it appear to stem from any sukuk-specific legal provisions that would pay out sukuk holders over holders of other bonds in the event of a default.
