Sukuk to Finance Projects: Allowed?

Question and answer details
As-salamu `alaykom, Dr. Monzer. We recently read that Egypt was considering issuing around $2 billion worth of sukuk to help fund its development projects and bridge the gap in its currency reserves.My question is: I understand that sukuk could be used to finance private sector projects on a profit sharing basis, but can sukuk be used to finance a country's budget deficit and not be considered a form of usury (riba) from the point of view of Islamic Law?And how does sukuk work exactly that makes it different from traditional interest-based finance? Jazakum Allah Khairan.
Monzer Kahf

Wa `alaykum as-Salamu wa rahmatullahi wa barakatuh.

In the Name of Allah, Most Gracious, Most Merciful.

 All praise and thanks are due to Allah, and peace and blessings be upon His Messenger.

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Brother, first of all, we’d like to say that we are impressed by your question, which emanates from a thoughtful heart and a good Muslim that is much caring about his country. May Allah Almighty help us all adhere to the principles of this true religion, Islam, amen.

Responding to your question, Dr. Monzer Kahf, a prominent Muslim economist and counselor, stated,

Dear Br. Tarek

In fact sukuk are a perfect Islamic alternative to treasury bond to finance budget deficit. They work better in the public sector than in the private one.

The budget in Egypt has several development projects such as roads, railroads, airports, etc. The government issues sukuk for these projects and their like as follows:

A wakalah (proxy) given by sukuk holders to the specific authority to construct the road whose cost is 2 billion Dollars; the road, say, takes 2 years to be built and then the government rents it for 10 years, a rent which ends with ownership, i.e., with payment of its cost price over this period.

Rent can be paid in advance, say the rent is taken at 5.5% for the ten year period. The rent payment can be distributed on the full 12 years instead of leaving the first 2 years without any payment. This is a payment in advance of the rent.

At the end of 12 years the road becomes owned by the road authority. Of course from day one of the rent the government intends to let the road be free for people. It is beautiful and fully Shari`ah compliant.

Some Shari`ah scholars go beyond the limit (in my opinion) to allow the same for an existing road by selling it cash to sukuk holders and rent/buy it back from them. I believe this is not permissible.

Sukuk have advantage over treasury bills in that they can only be issued for real projects not simply to cover deficit. They have a ceiling which related to real economic activity in the economy.

Of course if you take the opinion of “some scholars”, this advantage is lost because you take existing assets and issue sukuk on them once and again and they are already meaning there is no new real economic activity. 

Allah Almighty knows best.