The Syrian regime is preparing to issue Shariah-compliant debt certificates, its latest attempt to plug a gaping budget deficit and fund reconstruction efforts after 13 years of war.

The finance ministry’s August 15 announcement that it is preparing a law on what it labels “sovereign Islamic sukuk” marks the regime’s first move to issue such certificates, bond-like instruments that are compliant with Islam’s prohibition on interest.

The move is intended to generate funding for public investment projects, generating income both for the treasury and for creditors, as well as allowing private institutions to issue sukuk to finance their own projects.

Sukuk are issued on the basis of one or more shariah-compliant contracts, giving the holder a share in the ownership of certain assets or projects. They can be traded (like bonds) or redeemed, according to Shariah-based regulations. Sukuk-holders reap a profit or return from the assets, while sharing the risks of depreciation, damage and loss. The sovereign Syrian version would be tradable on the Damascus Stock Exchange.

Sukuk are comparable to traditional treasury bonds, but differ in certain ways. Bonds are government-issued debt instruments that bear a fixed or variable interest, paid over a specific period. The issuer assumes certain obligations towards the subscribers, paying the holder a financial return in the form of a guaranteed amount of interest, as well as the original loan amount on maturity. Government bonds are mainly intended to finance budget deficits, but in countries in dire financial straits, they bear risks such as default on interest or principal.

The Syrian regime has been using treasury bonds to cover a small percentage of its budget deficit since 2020.

In principle, Syrian treasury bonds could be purchased by various parties, such as state-owned and private banks, government institutions, legal entities, private individuals and business executives, whether Syrian or foreign. Even the governments of other countries, such as Russia and Iran, could buy them.

However, these bonds have been a failure. The percentage of the deficit they covered peaked at 11.4% in 2020, gradually decreasing to just 0.3% by 2024. Moreover, their value collapsed over their lifetime due to the collapse of the Syrian pound, making them ineffective at bringing money into the regime’s treasury.

They also attracted little demand, given both from their poor performance and the fact that bore interest, which is prohibited both in Shia and Sunni Islam.

In response, the regime has turned to sukuk in order to attract new creditors, particularly from other Arab states. The regime’s Monetary and Credit Council decided in July 2022 to allow Islamic banks to issue their own sukuk, in accordance with regulations over their form, the type of projects being financed, trading and redemption conditions, obligations on the issuer and the type of assets involved.

In principle, issuing sovereign sukuks could allow Damascus to tap into a broader market than treasury bonds could reach, and to finance essential projects—especially the small and micro projects that are vital to efforts to revitalize the Syrian economy, given the lack of international investment in large-scale works.

However, as was the case with its treasury bonds, the regime is unlikely to achieve its goals with the new sukuk, for various reasons. High poverty means ordinary Syrians cannot afford to subscribe. Confidence in the economy is low, and many are wary of partnering with the regime. What’s more, just like treasury bonds, sovereign sukuk’s performance will be undermined by the weakness of the Syrian pound.