Sukuk, and the missing half of the portfolio

A conventional portfolio usually pairs shares with bonds. Shares for growth, bonds for stability and income. A Muslim investor reaches that step and finds the entire second half of the standard recipe unavailable.

A bond is a loan. You lend a government or a company a fixed sum, they pay you a fixed percentage each year, and they return your principal (your original amount, before growth) at maturity. You own nothing. You are a creditor with a contractual right to be repaid more than you advanced. That is riba an-nasi'ah (extra charged purely because payment is delayed) as the riba lesson defined it, with you as the lender, and there is no serious scholarly disagreement about it.

What sukuk are supposed to be

Sukuk (certificates of ownership in an asset or project, not a loan) are certificates representing a proportionate ownership interest in an identifiable asset, the right to use and profit from something (a usufruct), a service or a business venture. AAOIFI's Shariah Standard No. 17 governs them.

The structural difference is ownership. A sukuk holder is meant to own a share of something real and to receive income generated by that thing: rent from a leased asset, a share of profit from a venture, a return from a defined project. If the asset stops producing, the payments stop. If the asset is destroyed, the holder bears the loss.

Sukuk are also easy to confuse with shares, because both are framed as ownership rather than debt. The difference is what you own. A share is ownership in an entire company, open-ended, with no maturity date: your return is whatever the business earns and retains or distributes, indefinitely, and you carry the full range of that business's fortunes. Sukuk ownership is narrower and time-limited: you own a share of one specific asset or project, your return is tied to what that asset generates, and the certificate typically has a fixed term at the end of which the arrangement unwinds. A share makes you a part-owner of a business's entire future. A sukuk makes you a part-owner of one thing that business is doing, for a defined period.

The criticism, which comes from inside the field

Many sukuk in the global market are asset-based rather than asset-backed. The distinction is not cosmetic. In an asset-backed structure, holders have genuine legal ownership of the underlying asset and genuine recourse to it if things go wrong. In an asset-based structure, the asset is used to construct the form of the transaction, but the holders' real recourse is to the issuer, and the issuer often gives a purchase undertaking to buy the asset back at a predetermined price at maturity.

That purchase undertaking is the crux. If the issuer is contractually bound to return the original amount regardless of what happened to the asset, the holder's capital is effectively guaranteed and the risk-sharing that justified the structure has been removed. What remains looks economically like a bond with extra documentation.

Whether particular current structures adequately address that criticism remains genuinely disputed. Practice varies by issuer, jurisdiction and structure, and a blanket judgment in either direction would be overstating what can be known from outside. If you are putting meaningful money into a specific sukuk product, the structure of that specific product is the question, and it is one for a qualified scholar rather than a general article.

The Australian access problem

For an Australian retail investor the practical situation is narrow, and the honest summary is that this is an access problem more than a choice problem.

• Direct international sukuk are effectively closed to retail. Minimum parcels in the global sukuk market typically run to US$100,000 to US$200,000, which puts them out of reach for most individuals regardless of interest.
• ASX-listed access is essentially one product. The site's research found a single ASX-listed sukuk vehicle available to Australian retail investors: the Hejaz Sukuk Active ETF (ASX: SKUK), launched in November 2023. It holds a diversified portfolio of global sukuk against the Bloomberg Global Aggregate USD Sukuk Index, and its management fee is 1.33%, which is high relative to conventional fixed-income ETFs and reflects both active management and the narrowness of the market.
• Single-issuer concentration. One product means one manager's judgment about sukuk structures, one fee schedule and one closure risk. That is the same issue flagged above about screened equity funds, in an even narrower market.

The full research, including the minimum-parcel figures, the AAOIFI Standard No. 17 source and the single-issuer risk discussion, is in the site's guide on sukuk in Australia. Check that page for the current state, since a market this small can change with one listing.

What all of this means for building a portfolio

The conventional shares-plus-bonds template does not transfer, and pretending otherwise helps nobody. What is genuinely available to an Australian Muslim investor for the stabilising half of a portfolio is a short list: cash held in non-interest-bearing accounts, sukuk through the one listed vehicle, and in some cases physical gold, which comes with its own riba al-fadl (unequal exchange of the same commodity, hand to hand) rules about immediate possession from the riba lesson.

The practical consequence is that a compliant portfolio tends to be more equity-weighted than a conventional one at the same life stage, simply because the alternatives are thinner. That raises the importance of everything in risk, return and time horizon: a longer time horizon (how many years until you need the money), a larger emergency fund (cash set aside for when things go wrong) so you are never forced to sell, and a realistic understanding that the ride will be bumpier.

That is a constraint to plan around rather than a reason to compromise, and it is one of the clearest cases here where the compliant path is genuinely harder rather than merely different.