Comparison beteewen Sukuk and Conventional bond

Topics: Bond, Stock, Security Pages: 1 (495 words) Published: October 30, 2014

Conventional bonds are debt securities issued by governments or corporations that promise to make payment periodically for a given period (Mishkin and Eakins, 2012). Islamic Bonds, referred to as Sukuk, is a certificate of a debt instrument which complies with Islamic law (Thomas, Cox & Kraty, 2005). Both conventional bond and Sukuk bears profit and are traded over the stock exchange market and over the counter (OTC). They are used to raise capital of a company on a normal yield price with a fixed maturity period. A major characteristic difference between conventional bonds and Sukuk is the ownership of the asset which bondholders are entitled to. Sukuk is backed by tangible asset. Thus, those who have partial claim in a Sukuk have an undivided ownership in the underlying asset (Ashar, 2013). As stated in the Ijarah, a Syariah contract, Sukuk bears with undivided ownership in the leased asset and has authority to the cash flow stream arising from it and the proceeds from sale of the assets (Bank Islam). With this, investors can be assured that a major part of their investment can be retrieved when things go terribly wrong in the bond issuer’s company. In contrast to conventional bonds, bondholders do not have an ownership in the bonds nor a claim of running the company that issues the bond as they are considered as a debt obligation, whilst bond issuers have total control in the asset. In conclusion, while a conventional bond represents a share in total debt of a business or project, Sukuk represents a share in the business. Additionally, the financial purposes of conventional bonds and Sukuk differ from each other. Conventional bonds are issued to finance almost any business prospects, but only if the business is under a legal framework. Conversely, the activity that Sukuk issuers involve complies with all of the Islamic laws, it has to be acceptable in the nature and use in the business (Bursa Malaysia). For instance, alcohol businesses violate Islamic...
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