Do Sukuk (Islamic Bonds) Have a Role in Today’s Global Capital Markets?

Abstract

Both conventional bonds and sukuk attempt to mobilize funds from entities with surplus funds to those with shortages, in line with the objectives of a financial system. But there are structural and risk–return differences between the two. In conventional bonds, the contract is based on the sale of debt. With sukuk, the performance of the contract is closely linked to an asset or a project in which the rewards and risks are shared. The two financing alternatives are clearly different. Conventional bonds are based on debt instruments (IOUs), whereas sukuk financing is based on equity-like arrangements. Conventional bond issuers can mitigate financial risk by issuing sukuk that do not introduce the possibility of bankruptcy in case of financial difficulty or default. Sukuk investors can benefit from a collateralized, maturity-specific, limited-risk, equity-like claim. Sukuk issues are available to governments, financial institutions, and investors regardless of their religious background, beliefs, and faiths. The use of sukuk along with conventional bonds offers additional opportunity for bond issuers of all kinds around the world.