What are the advantages and disadvantages of Sukuk?

Answer 1

Sukuk have great potential for promoting risk sharing thereby increasing savings mobilization and investment, spurring growth leading to enhanced welfare.

Sukuk is based on an underlying transaction which creates a close link between financial and productive flows. The financing must be channeled for productive purposes such as project financing, rather than for speculative activities. Thus, the risk exposure is to the project and not to the uncertainties or activities that have no real economic benefits. This contributes to greater stability of the financial system.

Moreover, under the risk-sharing principle required, there is an explicit sharing of risk by the financier and the borrower. This arrangement will entail the appropriate due diligence and the integration of the risks associated with the real investment activity into the financial transaction. The real activity is expected to generate sufficient wealth to compensate for the risks.

One of disadvantages is the lack of standardization.