Sukuk
Candlefocus EditorSukuk are specialized financial instruments used in Islamic banking and finance, and have the same economic function as conventional bonds. They are often structured as certificates of equal denomination representing a share of the ownership in an asset. Investors in sukuk receive structured returns derived from profits generated through the assets’ utilization.
Sukuk and bonds share the same underlying principle and that is to raise capital through the issuance of regular payments, indicating regular and timely payment of the return of capital to investors. However, there are several important distinctions between the two instruments that are to be noted:
First and foremost, while bonds represent an indirect interest in a loan, sukuk is an investment with legal ownership of an asset.
In a sukuk, investors are typically buyers of tangible assets such as property or real estate, with those assets being bought with money borrowed from the entities who are issuing the sukuk. This gives the issuer a contractual relationship with the investor which is governed by a set of asset-based obligations set forth in the sukuk agreement.
In addition, sukuk are structured to comply with Islamic Law, or Shariah law. Whereas conventional bonds typically entail interest payments for investors, sukuk returns involve profits generated from tangible assets, such as rental payments on properties or real estate. In other words, the source of return for sukuk holders is not speculation or uncertain future income; it is purely derived from the tangible asset which the sukuk represent.
Finally, the terms of sukuk are usually not negotiable after their issuance, unlike those of conventional bonds. They normally provide more protections for investors, as they are more likely to be individualized and explicitly linked to specific types of assets.
In conclusion, on the surface, Sukuks and conventional bonds appear to be similar, however they are detailed and specific instruments which take into consideration the principle of Shariah law. These distinctions should be taken into consideration when evaluating the investment potential of both financial instruments.