In the name of Allah, the compassionate the merciful
(For financial literacy education)
First of all, Islamic finance refers to financial activities that comply with Sharia, or Islamic law. It is guided by principles rooted in the Quran and the Sunnah (teachings of the Prophet Muhammad) may the peace and blessings of Allah be upon him. It is strictly devoid of riba (interest), gharar (excessive uncertainty), maysir (gambling), and all games of chance. It is also strictly devoid of dealing in illicit commodities such as tobacco, alcohol, pornography, pork, dealing in weapons, etc. Further, Islamic finance provides solid protection to the customers, investors, and the financial institution itself, and it also preserves the financial system itself for continuity. In fact, Islamic Finance is one of the safest, if not the safest financial systems in modern times.
Bonds and Sukuk are both debt instruments that allow governments and corporations to raise capital by borrowing money from investors. However, there are significant differences between the two, particularly in how they comply with Islamic finance principles.
Interest-Based: Conventional bonds involve interest payments to bondholders, which is considered riba (usury) and is not permissible in Islamic finance. Therefore, bonds are not Sharia-compliant.
Fixed Returns: Bondholders receive a fixed interest rate, and their returns are not linked to the performance of the issuer’s business.
Ownership Rights: Bondholders do not have ownership rights in the issuer’s assets or business, as they are purely creditors.
Transfer of Risk: The issuer of the bond assumes all the financial risk associated with the bond, and bondholders typically do not participate in profit or loss sharing.
Sukuk (Islamic Bond):
Sharia-Compliant: Sukuk, also known as Islamic bonds, are structured to be compliant with Islamic finance principles. They do not involve interest payments and illicit product dealings making them a permissible investment option for Islamic investors. In other words, a Sukuk investment is a halal investment.
Asset-Backed: Sukuk are typically asset-backed, meaning that they represent ownership in specific underlying assets or projects. This ensures that the investment is tied to a tangible, halal (permissible) asset.
Profit and Loss Sharing: Sukuk often includes profit-sharing or revenue-sharing features, so the returns to investors are linked to the performance of the underlying asset or project. This aligns with the principle of risk-sharing in Islamic finance.
Ownership Rights: Sukuk holders have ownership rights in the underlying assets or business ventures, and they may have a say in decision-making or profit distribution, depending on the structure of the Sukuk.
Rental Income or Services: Some Sukuk structures involve rental income from the underlying asset or the provision of services, making the returns more in line with Islamic finance principles.
In a nutshell, while both bonds and Sukuk are used to raise capital through debt financing, the key distinction is that bonds involve interest payments and are not considered Sharia-compliant, while Sukuk is structured to adhere to Islamic finance principles (halal investment). Sukuk offers an alternative to conventional interest-bearing bonds for Islamic investors and issuers who wish to access debt capital markets while remaining compliant with their religious beliefs. And Allah knows best! Praise be to Allah in Whose favor good deeds and accomplished (ibn Majah 3803).
YAHAYA ILIASU MUSTAPHA
The writer is an Islamic Banking and Finance patron and advocate in Ghana.
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