Sukuk are financial instruments and certificates of equal value representing undivided shares in ownership of tangible assets/ projects/ usufructs/ services/ and broadly any economic activity. The holder of sukuk is entitled to receive periodical payments based on the proceeds generated by the underlying.
Bonds are interest-bearing or discounted securities that pay the holder a specified amount of money (the interest), usually at certain intervals, in addition to its face value (principal) at maturity.
The main differences between sukuk and bonds are:
- Sukuk differ in nature from bonds, irrespective of a few similarities. Sukuk are, and must be, backed by assets, projects and/ or economic activities (asset-backed sukuk) while conventional bonds are based on debt.
- Sukuk represent proportionate ownership (share) in the underlying assets/ project/ activity, whereas conventional bonds are just debt obligations on the issuer towards bondholders (share in debt).
- The fair value of bonds is usually based on the issuer’s credit worthiness and the interest rate implicit in the transaction, while the fair value of sukuk is mainly based on the market value of the underlying assets/ project/ activity.
- Bondholders receive regular interest payments (fixed or floating) over the life of the bond, and the principal is guaranteed, i.e., bondholders receive the face value of their bonds at maturity date. In sukuk, the holder receives a share of profit/ rental generated by the underlying assets/ project/ activity. The face value of sukuk is not guaranteed (i.e. sukuk holders do not receive the face value of their sukuk holdings at maturity).
- In bonds, the performance of the underlying does not affect bondholders, while in sukuk, the losses and costs related to the underlying affect sukuk holders.
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