Fixed-Income 101: Sukuk vs Bonds

Written by Haider Saleem
Journalist and Political Analyst | LinkedIn / X

Why this comparison matters

Fixed-income instruments can help smooth portfolio returns and diversify risk. Alongside traditional bonds, sukuk have developed into a sizeable global market used by sovereigns and companies.

Quick definitions

Conventional bonds (haram)

A bond is a debt instrument: you lend to the issuer and receive periodic interest (the coupon) and your principal at maturity. Bond prices move inversely to prevailing interest rates, while outcomes are shaped by credit quality and duration (rate sensitivity).

Sukuk (halal)

Sukuk are Sharia-compliant certificates that give investors ownership or beneficial rights linked to tangible assets or permissible activities. Investor returns come from asset-based cash flows – for example, lease rents (ijāra/ijara) or profit from a sale contract (murābaḥa/murabaha) – rather than interest. In global markets, sukuk are commonly issued as trust certificates via a special-purpose vehicle (SPV), often under English law.

Why many Muslims avoid conventional bond interest : Under Sharia, riba (interest) is prohibited. Sukuk therefore seek to channel returns from real economic activity (e.g., lease or sale contracts) instead of lending at interest.

How the cash flows typically work

Plain-vanilla bond. The issuer pays fixed or variable interest on schedule, then repays principal at maturity; the market price fluctuates with interest rates and credit risk.
Ijara-style sukuk (common in practice). An SPV issues certificates and uses proceeds to purchase assets that are leased to the obligor. Lease rentals flow to the SPV and are distributed to certificate holders; redemption is often via a purchase undertaking. Many listed sukuk are asset-based (investors ultimately rely on the obligor’s credit), while asset-backed structures provide stronger recourse to the asset pool itself.

Sukuk vs Bonds — at a glance

Feature	Conventional Bonds (haram)	Sukuk (Sharia-compliant)
Legal nature	Debt claim on the issuer.	Ownership/beneficial rights in assets or a Sharia-compliant arrangement via SPV.
Source of return	Interest (coupon) paid by issuer.	Asset-linked cash flows (e.g., lease rent, sale profit); no interest.
Investor recourse	Primarily to the issuer/obligor.	Asset-based: practical reliance on obligor credit. Asset-backed: stronger recourse to asset pool.
Main pricing drivers	Rates/duration, issuer credit, market liquidity.	Similar drivers plus structure/asset risks and documentation specifics.
Tradability & venues	Deep global markets; benchmark curves (e.g., U.S. Treasuries).	Listed in hubs such as London, where >US$50bn has been raised across 68 sukuk issues to date; liquidity varies by structure and investor base.
Typical legal form	Bond/loan obligation of issuer.	Trust certificates via SPV (often under English law).
Sharia basis	Not applicable.	Avoids riba; returns arise from assets/contracts (ijara, murabaha, etc.).

Sources for table: Investopedia (bonds), ACCA and ACT explainers (sukuk mechanics, asset-based vs asset-backed), and London Stock Exchange (listing venue and tally). London Stock Exchange

The UK sovereign sukuk

2014: The UK became the first non-Muslim-majority country to issue a sovereign sukuk—£200m—at a 2.036% profit rate aligned to gilts, with ~£2.3bn in orders; the notes matured on 22 July 2019.
2021: The UK issued a second sovereign sukuk of £500m (Al-Ijara), a long five-year maturing 22 July 2026; official notices and press coverage confirm size, structure and maturity.

Advantages and trade-offs

Where bonds are strong

Depth & transparency. Government bond markets (e.g., U.S. Treasuries) anchor pricing and provide liquidity and benchmark curves.
Simple mechanics. Coupons and principal are straightforward to understand—useful for first-time fixed-income learners.
Key risks. Interest-rate risk (prices fall when rates rise), credit risk, and—for non-domestic bonds—currency/sovereign risk.

Where sukuk are strong

Sharia alignment. Returns arise from assets/transactions, not interest—important for investors avoiding riba.
Diversified funding base. Sukuk can broaden an issuer’s investor reach; listings in hubs like London provide visibility.
Trade-offs/risks. Structural/documentation complexity, asset availability, Sharia non-compliance risk, and at times thinner secondary liquidity due to buy-and-hold ownership.

Where do sukuk list/trade?

Multiple hubs; London Stock Exchange notes >US$50bn raised across 68 issues to date. Liquidity varies by issue and investor base. London Stock Exchange

Conclusion

Bonds and sukuk can both serve income-seeking, risk-managed objectives – but they get there via different routes. Bonds represent debt with interest; sukuk are asset-linked certificates designed to comply with Sharia by sourcing returns from real economic activity.

References

ICD–LSEG Islamic Finance Development Report 2024 (sukuk outstanding US$863bn in 2023; issuance >US$200bn). icd-ps.org
Morningstar “Decoding Sukuk” (Jun 26, 2025): ~US$930bn outstanding at end-2024. marketing.morningstar.com
World Bank blog (Mar 4, 2025): ~US$180bn issuance in 2024; “on pace” toward US$1tn outstanding. World Bank Blogs
London Stock Exchange sukuk page (venue overview; >US$50bn across 68 issues). London Stock Exchange
Investopedia – Government bonds (definitions; coupons; rate sensitivity).
Investopedia – Sukuk explainer (updated Aug 8, 2025).
ACCA – Islamic finance explainer (sukuk ownership/asset basis; asset-based vs asset-backed).
Association of Corporate Treasurers (ACT) – “What are sukuk, and how do they work?” (SPV/trust-certificate mechanics; investor recourse; pros/cons).
GOV.UK – 2014 first UK sovereign sukuk (profit 2.036%; orders ~£2.3bn). GOV.UK
HM DMO – 2021 sukuk launch notice (£500m, Al-Ijara, maturity 22 July 2026). Department for Media and Office
Reuters – 2021 UK sukuk sale coverage (confirms size/maturity

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