An Ijara sukuk is a certificate representing an ownership share in a leased asset, such as a building or an aircraft, whose rents paid by the lessee provide the holders' periodic return until the asset is finally bought back.
The sale and leaseback at the heart of the issue
The originator, often a government or a large company, sells an asset to a special purpose vehicle that issues the certificates. The proceeds pay the purchase price, and the vehicle immediately leases the asset back to the originator for the full term of the transaction.
Which assets suit this structure?
The asset must be durable, identifiable and capable of providing use: government buildings, toll roads, land, aircraft or ship fleets. Money, consumable inventory and receivables are excluded, because something that disappears through use cannot be leased.
Ownership is transferred, but what kind?
In many sovereign issues holders receive beneficial ownership while legal title stays with the state, avoiding registration duties or land restrictions. This choice makes the sukuk asset-based rather than asset-backed.
Asset-based or asset-backed: what changes on default
If the originator stops paying, holders of an asset-based sukuk mainly claim against it under its purchase undertaking. In an asset-backed structure, a true sale should in principle allow the asset to be seized and sold, which remains rare.
Setting the rent: fixed or benchmarked
Rent can stay the same for the whole term or be reset periodically against a market benchmark. Sharia allows such indexation provided the first period's amount is known and each reset is calculated before the period it applies to.
Example: a 200 million building over five years
Holders buy the building for 200 million and lease it to the state for 10 million a year. Each year they receive those rents, a 5 percent return. At maturity the state buys the building back for 200 million and the certificates are cancelled.
Who insures and maintains the leased building?
Under Ijara, structural maintenance and insurance fall on the lessor, meaning the holders. In practice they appoint the originator as service agent, which performs these duties and recovers the cost from rents; routine upkeep remains with the lessee.
Total loss of the asset: what happens next?
If the asset is destroyed, the lease ends because there is no longer any usufruct to pay for. Proceeds of the Takaful cover arranged by the service agent then repay holders; if they fall short through the agent's fault, the agent covers the gap.
Final buy-back: market price or face value?
The originator signs a unilateral purchase undertaking. AAOIFI standards allow this price to equal the original value in Ijara, because the lessor genuinely bears ownership risk, whereas such a face value guarantee is refused for Musharaka sukuk.
Why these certificates trade freely
The certificate represents a real asset and its rents, not a money debt. It can therefore be bought and sold at any price on the secondary market, which makes it the preferred structure for sovereign issuers and investors seeking liquidity.
Well-known sovereign issues
The United Kingdom issued a sovereign sukuk in 2014 based on leasing government buildings, and many states in the Gulf, Asia and Africa use this structure. Central banks also rely on it as a template for creating liquidity instruments.
Risks the investor needs to weigh
The main risk is the originator's credit, since both rents and buy-back depend on it. Added to this are legal risk around the ownership transfer, local taxation of the leased asset and, for benchmarked rents, income that changes from one period to the next.
Specialist external source
The IMF presents its work on Islamic finance, including analysis of the sukuk market and guidance for sovereign issuers on the legal and tax framework.