Difference Between Sukuk And Bond Pdf

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Sukuk are defined by the AAOIFI Accounting and Auditing Organization for Islamic Financial Institutions as "securities of equal denomination representing individual ownership interests in a portfolio of eligible existing or future assets. Sukuk were developed as an alternative to conventional bonds which are not considered permissible by many Muslims as they pay interest and may finance businesses involved in non-Sharia-compliant activities gambling, alcohol, pork, etc. Sukuk securities are structured to comply with Sharia by paying profit, not interest—generally by involving a tangible asset in the investment. For example, Sukuk securities may have partial ownership of a property built by the investment company and held in a Special Purpose Vehicle , so that sukuk holders can collect the property's profit as rent , which is allowed under Islamic law.


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Measure content performance. Develop and improve products. List of Partners vendors. A sukuk is an Islamic financial certificate, similar to a bond in Western finance, that complies with Islamic religious law commonly known as Sharia. Since the traditional Western interest-paying bond structure is not permissible, the issuer of a sukuk essentially sells an investor group a certificate, and then uses the proceeds to purchase an asset that the investor group has direct partial ownership interest in.

The issuer must also make a contractual promise to buy back the bond at a future date at par value. With the rise of Islamic finance , sukuk have become extremely popular since , when the first such products were issued in Malaysia. Bahrain followed suit in Fast forward to current times, and sukuk are used by Islamic corporations and state-run organizations alike around the globe, taking up an increasing share of the global fixed-income market.

Islamic law prohibits what's known as " riba ," or what we understand as " interest " in the West. Therefore, traditional, Western debt instruments cannot be used as viable investment vehicles or ways to raise capital for a business. To circumvent this, sukuk were created in order to link the returns and cash flows of debt financing to a specific asset being purchased, effectively distributing the benefits of that asset.

This allows investors to work around the prohibition outlined under Sharia and still receive the benefits of debt financing. However, because of the way that sukuk are structured, financing can only be raised for identifiable assets. Thus, sukuk represent aggregate and undivided shares of ownership in a tangible asset as it relates to a specific project or a specific investment activity.

An investor in a sukuk, therefore, does not own a debt obligation owed by the bond issuer, but instead owns a piece of the asset that's linked to the investment.

This means that sukuk holders, unlike bond holders, receive a portion of the earnings generated by the associated asset. Sukuk and conventional bonds do share similar characteristics, but also have important key differences:.

Sukuk investors receive profit generated by the underlying asset on a periodic basis while bond investors receive periodic interest payments. If the asset backing a sukuk appreciates then the sukuk can appreciate whereas bond yield is strictly due to its interest rate. Assets that back sukuk are halal whereas bonds are often riba and may finance non sharia compliant businesses or fuel speculation. Sukuk valuation is based on the value of the assets backing them while a bonds price is largely determined by its credit rating.

The most common type of a sukuk comes in the form of a trust certificate. These certificates are also governed by Western law, however, the structure of this type of sukuk is more nuanced. The organization raising funds first creates an offshore special purpose vehicle SPV. The SPV then issues trust certificates to qualified investors and puts the proceeds of the investments toward a funding agreement with the issuing organization. In return, the investors earn a portion of the profits linked to the asset.

Sukuk structured as trust certificates are only applicable if the SPV can be created in an offshore jurisdiction that allows such trusts.

This is sometimes not possible. If an SPV and trust certificates can't be created, a sukuk can be structured as an alternative civil-law structure. In this scenario, an asset-leasing company is created in the country of origin, effectively purchasing the asset and leasing it back to the organization in need of financing. International Markets. Fixed Income Essentials. Finra Exams. Fixed Income Trading. Your Privacy Rights. To change or withdraw your consent choices for Investopedia.

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Key Takeaways A sukuk is a sharia-compliant bond-like instruments used in Islamic finance. Sukuk involves a direct asset ownership interest, while bonds are indirect interest-bearing debt obligations. Both sukuk and bonds provide investors with payment streams, however income derived from a sukuk cannot be speculative that would make it no longer halal.

Similarities Both provide investors with payment streams. Bonds and sukuk are issued to investors and may be used to raise capital for a firm. Both are considered to be safer investments than equities. Key Differences Sukuk involves asset ownership while bonds are debt obligations. Compare Accounts.

The offers that appear in this table are from partnerships from which Investopedia receives compensation. Related Terms Sharia Sharia is an Islamic religious law that governs religious rituals and aspects of day-to-day life, including finance and banking. Understanding Islamic Banking Islamic banking is a banking system that is based on the principles of Islamic law Sharia law and guided by Islamic economics. Debt Issue A debt issue is a financial obligation that allows the issuer to raise funds by promising to repay the lender at a certain point in the future.

Kicker A kicker is added to a debt instrument to make it more desirable to potential investors. In real estate, a kicker is an added expense to get a loan approved. Security A security is a fungible, negotiable financial instrument that represents some type of financial value, usually in the form of a stock, bond, or option.

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Comparison between Sukuk and Conventional Bonds: Value at Risk Approach

Hebah Shafeq Shalhoob. Farooq Ahmad Supervisor. Ahmed Beloucif Supervisor. Sukuk are an important mode of financing in the Islamic financial system. As usury interest is prohibited in Islam, conventional bonds are not suitable for investors in Islamic countries. Since their launch in the s, Sukuk have gained recognition and popularity as a substitute for conventional bonds.

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Comparison between Sukuk and Conventional Bonds: Value at Risk Approach

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Concept of Sukuk and Its Development Process 1. What is Sukuk? Differences Between Sukuk and Conventional Bond 1.

Although a common starting point for explaining sukuk is to use bonds as a comparison point, it is important to understand that there are certain fundamental differences. Sukuk adhere to an Islamic view of finance, avoiding Riba generating money from money, i. The assets that back sukuk are compliant with Shariah.

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