How are sukuk different from conventional bonds?
(1) Sukuk (plural of Arabic word sakk meaning certificate) are Islamic bonds, which are asset-based securities. Those who purchase sukuk are rewarded with a share of the profits derived from the asset. They don’t earn interest payments because of the Islamic ban on interest. However, conventional bonds are debt instruments and the investor receives an interest payment or coupon, against their investment.
(2) Sukuk gives the investor or holder an undivided beneficial ownership in the underlying assets on which the Islamic bond is based. This ownership right is directly proportional to the total amount he has invested or the number of sukuk he holds. Conventional bond just represents a contractual debt obligation from the issuer to the bond holder. So conventional bond does not bestow on the investor any ownership rights in the asset, project, business, or joint venture the bond supports.
(3) The assets on which sukuk are based must be sharia-compliant. Sukuk holders are entitled to a share in the revenues generated by the sukuk assets. There are no such class restrictions with regard to the nature of assets when it comes to conventional bonds. The money mobilized through conventional bonds can be used to finance any asset, project, business, or joint venture that complies with the local legislation.
(4) Most individuals invest or buy sukuk because of their religious dispositions. People, who buy or invest in conventional bonds do so solely guided by monetary or profitability considerations.
(5) The face value and issue price of a sukuk is based on the market value of the underlying asset. The issue price and face value of a conventional bond is based on the issuer’s credit worthiness, including the assigned market rating.
(6) Sukuk holders receive a share of profits from the underlying asset and in case of loss, they also have to accept a share of the loss incurred. So, the initial investment isn’t guaranteed and the sukuk holder may not get back the entire principal amount. Conventional bond holders receive regularly scheduled and often fixed rate interest payments during the life of the bond till they mature and are redeemed, and their principal is guaranteed to be returned on the bond’s maturity date.
(7) In the case of sukuk, there is a possibility of capital appreciation. So, investors may sometimes get more return on their invested capital or more than the principal amount. As against this, in case of conventional bonds the return is fixed and cannot vary with the performance of bond issuer.
(8) Sukuk holders are affected by costs related to the underlying asset. Higher costs may translate to lower investor profits and vice versa. Bond holders generally aren’t affected by costs related to the asset, project, business, or joint venture they support. Hence, the performance of the underlying asset doesn’t affect investor returns.
(9) Sukuk are of recent origin and they emerged to fill a gap in the global capital market because of Islamic investors wanting to balance their equity portfolios with bond-like products. Conventional bonds have been in existence for centuries and have been in use as financial instruments across the world irrespective of the regional affiliation or religious disposition of the issuer or subscriber.
(10) Of late, the sukuk market is growing rapidly on the back of significant growth being witnessed by Islamic finance across the world coupled with the fast growth in Muslim population. Conventional bonds are not witnessing that kind of growth or popularity or demand.