Investments
What is sukuk and how is it different from a bond?
Sukuk explained: certificates that aim to represent interests in assets or activities, and how they compare to conventional bonds.
The short answer
Sukuk are certificates structured to represent ownership interests in specified assets, services or projects. Unlike conventional bonds (which are debt obligations that promise interest), sukuk returns are linked to the performance of the underlying assets and their contractual structure.
What sukuk aim to be
Sukuk are intended to reflect an ownership share in underlying assets, or rights to income from an activity. The documentation should make clear what owners of the sukuk actually own and what cashflows they are entitled to.
Because sukuk structures vary (asset-backed, asset-based, ijara/lease and others), investors must read the prospectus to understand whether they hold ownership, a lease claim, or a different contractual right.
Differences from bonds and practical points
A conventional bond is typically a contract to pay fixed (or floating) interest and return principal. Sukuk avoid explicit interest by linking returns to asset performance or rental income, but that does not make them risk-free.
AAOIFI’s sukuk standard provides guidance on how sukuk should be structured and disclosed. Always check the legal form, underlying assets, priority of claims and whether a fund mixes different types of sukuk — these factors affect risk and suitability.
What this means in practice
- 1Read the sukuk prospectus carefully to identify the underlying assets and the legal rights of certificate-holders.
- 2Check whether the sukuk are asset-backed (assets segregated) or asset-based (credit exposure backed by assets) and what that means for recovery in default.
- 3Review the Shariah board’s statement on structure and ongoing governance.
- 4Compare credit risk, tenor and liquidity with other investments.
- 5If investing via a fund, examine fund disclosures on sukuk types and weighting.