3 Differences and Similarities Between Bonds and Sukuk You Need to Know

We may have noticed that the origin of Sukuk differs from bonds. Sukuk represents ownership of a well-defined asset, while bonds reflect pure debt obligations from the issuer to investors or bondholders. This article will discuss the differences between bonds and Sukuk from the Shariah point of view.

 

Bonds

Bonds represent pure debt obligations from the issuer to the investors or bondholders. They are evidence of debt from investors to issuers, similar to a bank loan to a company. The bond’s repayment is made up of the borrowed capital (principal) plus interest. Bonds are often unsecured because no asset or collateral is backing the loan, and the issuer is the only source of recourse. There are, however, secured bonds. The bondholders of a secured bond will have a security interest in the issuer’s asset.

Since typical bonds are basically loans that then represent a contract, whose subjects are purely earning money on money, which is the classic definition of riba, then selling a bond is like selling a riba-based instrument and hence is forbidden from the Islamic point of view.

Sukuk

We may have seen that the origin of Sukuk is somehow different from bonds. Unlike bond obligations, the asset-related expenses in Sukuk are attached to Sukuk holders. Accordingly, the sale of Sukuk, both in primary and secondary markets, is a sale of a share of an asset, while selling a bond is basically the sale of debt. The tradability of Sukuk in the secondary market depends on the nature of the underlying asset. Global shariah standards do not allow the sale of debt with discounting but allow the sale of tangible assets, some intangible assets, and interest in ventures.

Furthermore, Sukuk also can be classified into asset-backed and asset-based Sukuk. Click here to learn more about asset-backed and asset-based Sukuk.

To sum up the differences between bonds and Sukuk, here are the 3 main differences:

 BondsSukuk
Primary level relationshipLoanSale, lease, partnership, or agency
Return to investorsInterest on loan recourse to the issuerProfit elements in the sale, lease, or partnership contracts
Tradability in the secondary marketSale of debtGlobal shariah standards do not allow the sale of debt with discounting but allow the sale of tangible assets, some intangible assets, and interest in ventures.  

Sukuk and conventional bonds have several similar characteristics:


Both Sukuk and bonds provide investor groups with payment streams.
Companies issue bonds or Sukuk to investors to raise some capital for their firm.
Compared to equities, Sukuk and bonds are much safer investment types.
Sukuk holders earn profit generated by the underlying asset periodically whilst bondholders receive interest payments on a periodic basis.

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