What Are Sukuk? How Islamic Bonds Work and How to Invest

Sukuk (Islamic investment certificates, also called Islamic bonds) are securities that give you part ownership of a real asset, project or business. Instead of riba (interest) on a loan, you receive a share of the rent or profit that asset earns, and the issuer usually buys the asset back at maturity. The singular is sakk (certificate).

If you want fixed-income exposure through instruments structured to follow shariah (Islamic law), sukuk are the main option. AAOIFI (the Accounting and Auditing Organization for Islamic Financial Institutions) sets the conditions a sukuk must meet to count as halal (permissible under Islamic law). You can invest in sukuk through ETFs and mutual funds.

Key takeaways

• A sukuk gives you part ownership of an asset and a share of its income, while a bond is a loan that pays interest.
• Most rated sukuk depend on the issuer's promise to buy the asset back, so you carry the issuer's credit risk much as a bondholder does.
• The contract behind a sukuk decides whether you can sell it before maturity, and trading is thinner than in bond markets.
• Scholars continue to debate how closely some structures resemble bonds. AAOIFI tightened its rules in 2008, and its proposed Standard 62 is still a draft.
• Sukuk funds include SPSK in the US and HSBC and iShares UCITS ETFs available to UK investors.

Table of contents

1. How sukuk work
2. Sukuk vs bonds
3. Types of sukuk
4. A short history of the sukuk market
5. Are sukuk halal? Objections and concerns
6. How to invest in sukuk
7. Summary
8. Frequently asked questions

How sukuk work

These numbers are illustrative. Say a company needs money for a new project, and you have $1,000 to invest. The company can raise the money with a conventional bond or with an ijarah (lease) sukuk.

With a bond, you lend the company $1,000. It pays you interest, say $50 a year, and repays your $1,000 at maturity. The company owes you the same amount whatever it does with the money. Scholars widely regard bond interest as riba, which is why Muslim investors look for alternatives.

With an ijarah sukuk, the same $1,000 works differently:

1. The company sets up a special-purpose company to hold the assets.
2. You and the other investors pay into the special-purpose company, which uses the money to buy an asset from the company, for example an office building. Your certificate records your share of that building.
3. The special-purpose company leases the building back to the company. The company pays rent, and your share of the rent, say $50 a year, is paid to you.
4. In this example, the company buys the building back at maturity at the agreed price of $1,000 per certificate. AAOIFI's rules allow a face-value promise in ijarah sukuk when it comes from the tenant, provided the tenant is not also a partner, a profit-sharing manager or an agent.
5. If this is an asset-based sukuk and the company fails, you rely on its buyback promise, just as a bondholder relies on its promise to repay. Your claim is then on the company, and only asset-backed sukuk give you a direct claim on the building.

Your cash flows look much like a bondholder's. The difference is the contract underneath: you earn rent from an asset you own a share of, instead of interest on a loan.

Sukuk vs bonds

Types of sukuk

Every sukuk rests on an Islamic contract. The contract decides what you own, where your return comes from and whether you can sell your certificate before maturity. AAOIFI set these trading rules in its Shari'ah Standard 17 on investment sukuk, first issued in 2003. For sukuk to trade, the pool must consist mostly of tangible assets or rights to use them, commonly understood as at least 51%, though thresholds vary by country, according to the Islamic Financial Services Board, or IFSB.

Ijarah

You own a share of an asset that is leased out, and the rent pays your distributions, as in the worked example above.

Murabaha

The sukuk money buys goods, which are then sold to the issuer at cost plus an agreed markup, paid over time. AAOIFI allows trading only while holders still own the goods. Once the sale is made you hold a debt, and under the majority view a debt can be sold only at face value.

Musharakah

You and the issuer are partners in a venture and share its profits by an agreed ratio.

Mudarabah

You supply the capital and the issuer manages the venture, with profits split by an agreed ratio.

Salam

You pay today for goods delivered on a set future date. AAOIFI permits trading salam certificates only after the goods are delivered and before they are sold on.

Istisna

Your money pays for an asset being built or manufactured, which the issuer buys on completion for an agreed price.

Wakalah

An agent, usually the issuer, invests your money in a pool of assets for a fee, and the pool's income pays you.

A short history of the sukuk market

Shell MDS issued Malaysia's first sukuk in 1990, raising RM125 million, according to the Securities Commission Malaysia. Malaysia followed with the first sovereign global sukuk in 2002, a five-year $600 million issue, and AAOIFI published its sukuk standard a year later.

The International Islamic Financial Market's Sukuk Report 2026 counted $262.9 billion of sukuk issued worldwide in 2025, and total sukuk outstanding crossed $1 trillion for the first time.

Are sukuk halal? Objections and concerns

AAOIFI's Standard 17 sets the conditions a sukuk must meet to count as shariah compliant. Some scholars still raise the objections below. For background, see our guide to shariah standards.

Are sukuk just bonds with a different name?

The answer depends on the difference between asset-based and asset-backed sukuk. Your rights after a default depend on the structure:

"In an asset-based structure, the payments of sukuk are based on the payments of or against the assets; however, the investors do not have recourse against the assets in the event of default or insolvency. In the asset-backed structure, there is a legal transfer of assets into special purpose vehicles (SPVs), and thus in the event of default/insolvency, investors have a recourse against the assets."

Most rated sukuk today are asset-based, often because legal and tax rules make a full transfer of title difficult. Mufti (Islamic legal scholar) Taqi Usmani and other critics say this makes many sukuk behave like bonds. AAOIFI's 2008 rules, described next, answered part of this objection.

Do buyback promises make sukuk the same as a loan?

In 2007, Usmani, then chairman of the AAOIFI Shari'ah Board, objected to musharakah and mudarabah sukuk in which the issuer promised to buy the assets back at their original price. In his view, that promise guaranteed investors' capital and defeated the risk-sharing purpose of a partnership. He was reported as saying that about 85% of sukuk did not comply with Islamic law because of repurchase agreements.

In February 2008, the AAOIFI Shari'ah Board responded. Holders of tradable sukuk must own real assets, and those sukuk may represent debts only incidentally. In partnership, profit-sharing and agency sukuk, the manager may promise a buyback at market value, net asset value, fair value or a price agreed when the buyback takes place. Shariah boards must also oversee how a sukuk runs. These rules are now part of Standard 17, and Gulf issuance of the affected structures dropped significantly afterwards, according to the World Bank paper.

What is AAOIFI Standard 62?

AAOIFI released an exposure draft of Shari'ah Standard 62 in November 2023. It would require a real transfer of legal ownership, and the risks that come with it, to sukuk holders. Rating agencies warned that this could make some sukuk look more like equity than debt. In April 2025, AAOIFI said the draft was under revision following industry comments. In September 2026, Standard 62 is still a draft, with no final text or effective date published.

Can sukuk default?

Yes. You carry the issuer's credit risk, along with price risk, currency risk and the risk that a structure is later challenged on shariah grounds. The Dana Gas case shows several of them.

Dana Gas of the UAE had $700 million of mudarabah sukuk due in October 2017. That June, the company declared the sukuk had ceased to be shariah compliant and were therefore unlawful under UAE law, and it offered to swap them into new sukuk paying less than half the profit rate. The English High Court held that Dana Gas's purchase promise was enforceable. Holders then approved a settlement by an overwhelming majority, choosing between an exit at 90.5 cents per dollar and a new three-year sukuk, according to Trowers & Hamlins.

Can you sell sukuk easily?

Selling is harder than with bonds. The IFSB found in 2026 that sukuk "were typically more costly to trade than bonds". In less developed local markets, the gap between buying and selling prices was about 0.40 percentage points wider for sukuk than for comparable bonds. In large hard-currency government programs, the extra cost was 0 to 0.10 percentage points. Many investors hold sukuk until maturity, which reduces secondary-market trading. An ETF lets you trade shares on any market day, but the fund's holdings still trade in these thinner markets.

Debt-based sukuk, such as murabaha, raise a further question. The majority view, reflected in International Islamic Fiqh Academy resolutions, allows a debt to be sold only in a few set forms, so in AAOIFI and Gulf practice debt-based sukuk generally trade only at face value. Malaysia takes a different position: its Securities Commission's Shariah Advisory Council accepted bai al-dayn (sale of debt) in 1996, noting that the Maliki and Shafi'i schools of Islamic law allow it under conditions while the Hanafi school rejects it.

How to invest in sukuk

Sukuk ETFs and mutual funds are open to individual investors. Buying a single international sukuk is harder: dollar sukuk usually come in minimum amounts of $200,000, as in the Sobha Sukuk offering circular.

Sukuk funds and ETFs

Figures from issuer documents, June to September 2026.

Zoya Pro screens the holdings of the ETFs and mutual funds it covers, so you can see whether a fund you're considering is covered and how it screens. SP Funds publishes a shariah certificate and auditor report on its SPSK page. For equity funds, see our guide to the best halal ETFs.

In the US

SPSK is listed on the NYSE. Its prospectus says distributions are generally taxable unless you hold the fund in an IRA or another tax-advantaged account. If you invest for retirement at work, see whether your 401(k) plan is halal. Investors outside the US can buy US-listed ETFs such as SPSK through brokerages with US market access.

In the UK

Both UCITS ETFs can be held in an ISA, and the iShares fund also in a SIPP. Check that your platform offers Euronext Amsterdam or SIX for SKUK.

The UK government issued its own sukuk in 2014 and 2021. The 2021 issue matured on July 22, 2026, and HM Treasury has said it is "not at this time planning to issue another Sukuk". For tax, HMRC treats the return on qualifying sukuk held by individuals as if it were interest.

In Indonesia

Indonesia sells retail government sukuk to its citizens. The SR024 series, offered from March 2026, uses an ijarah structure, starts at Rp1,000,000 and is tradable on the secondary market after a minimum holding period.

Summary

If you are considering a sukuk fund, check its holdings, shariah certificate, structure and costs before deciding. Our halal investing 101 guide shows how sukuk fit alongside halal stocks and funds.

Zoya does not provide investment advice. Consult a qualified advisor about your circumstances.

Frequently asked questions