In conventional finance, fixed income funds, based on obligations and bonds, present a less risky alternative to equity funds. Bonds are debt vouchers, issued by governments and corporations to raise money. Interest is paid on a a yearly basis and at the end of the lending period – the “maturity” of the bond – the face value of money lent out – is paid back to the creditor. Fixed income funds bundle several bonds to increase variety and thus reduce risk. In Islamic Finance, interest payment – Riba – is forbidden by the Shari’ah. Therefore, to enable believing Muslims to  invest in an asset similar to a fix-income fund with the same risk and return profile, special investment vehicles were designed that provide investors with an alternative to conventional bonds and fixed-income funds but nevertheless adhere to the Riba-law of the Shari’ah: These are the Ijarah and Sukuk Funds.

Sukuk are Shari’ah - compliant financial instruments that can be compared to conventional notes. Of the many categories of Sukuk, the most common in the market are Ijarah Sukuk, which are backed by leases and are often guaranteed by sovereign or regional governments. Ijarah funds are structured around a specific asset, such as a building, property, or infrastructure facility. The asset itself is sold to a special-purpose entity, that then issues the Sukuk to fund the asset’s purchase price. The special-purpose entity then leases the asset and receives periodic lease payments. At maturity, or in the event of dissolution, the special-purpose entity sells the asset back to the original seller at a predetermined price that includes any outstanding amounts still owned under the terms of the Ijarah fund. Ijarah funds can thus be considered as the Shari’ah compliant form of conventional leasing.

Inside an injara fund, a lot of transactions are bundled and the payments resulting from these transactions – like the leasing rates – are passed on to the Sukuk-fund-investor.