How are Sukuk (Islamic bonds) different from conventional bonds?

Islamic Finance & Shariah
1

Sukuk are sometimes referred to as the halal equivalent of bonds, what makes them halal?

2

It’s probably useful to first define these terms:
Sukuk and Bonds are financial instruments issued by Governments or Corporates to raise money from investors for a period of time.

Commonly, over this period, Sukuk and bonds distribute periodic coupon payments (either at a fixed or floating rate). At the end of this period, known as maturity date, issuers pay back the money raised from investors, known as the principal.

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3

I’m terms of fixed vs floating rate: Fixed rate coupon is characterized by its fixed coupon payment which does not change over time.

Floating rate coupon has a variable rate which changes periodically.

4

Conventional bonds are tied to a loan of money. Sukuk on the other hand are tied to an asset

5

Another difference is that in a conventional bond the investor shares no risk of the investment - they are guaranteed to have their money back with a fixed amount on top

Whereas with Sukuk the risk is shared (the extent of which is dependent on the setup of the Sukuk and impacts its permissibility status) between the lender and lendee

6

Another difference is that in Sukuk you can make a profit or loss based on two things: 1. The profit or loss made on the valuation of the principle amount 2. The profit share you are owed due to the profit generated by the asset

7

the asset that backs Sukuk has to be sharia compliant. Whilst Bonds can finance any asset so long as it complies with local legislation

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8

Trying to understand this a little more. A conventional bond relies solely on people setting aside money for it.

However the value of a sukuk relies on an asset.

Then how is a sukuk different to investing in a stock

9

are they also ones which have a lower value as a result?

10

Ok so to put it in basic terms: there’s profit and risk sharing?

11

Yes based on my understanding

12

So there’s parallels for sure.

The difference I think is that with a Stock you’re acquiring a “Share” of the business that you believe is profitable. The business doesn’t require your share to continue operating and making a profit but it does benefit from the general financing

Sukuk on the other hand are you making an asset available to a business or person by lending that asset to them almost in a like rental agreement where you share in the profits that the company makes from the asset (akin to dividend with stocks) and you share the risk/reward of the capital appreciation/depreciation of that asset

Think about for example buying stock in a laundrette company compared to owning a Sukuk of the washing machines that the laundrette is using from you to function

13

@HassanTariq tbh this probably will explain it more accurately: The Beginners Guide to Sukuk

14

Jazakum Allahu khairan, so how do they make the money? just through the investments only? and when they pay back the investors, all the money they make now onwards, is theirs right? does the investors get a %?

15

I see, I am still getting my head around this. What happens if the assets are not as valuable ? do the investors lose out also?

16

So conventional, you have to pay back the investors regardles right? Do they get any interest in it ?

17

Surely the floating rate is haram? As that is essentially variable rate interest no?

18

Yeah, this seems problematic then if there isn’t genuinely shared risk

19

Thank you really useful.

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20

This is really helpful. Thanks

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