For the fixed-income portion of a halal portfolio, understanding the distinction between sukuk and conventional bonds is not just academic — it is a matter of religious compliance.
The Fundamental Difference
Conventional bonds create a debtor-creditor relationship. The issuer borrows money and promises to repay principal plus interest. This interest payment is riba. Sukuk create an ownership relationship — the investor holds a proportional stake in an underlying asset and receives returns from that asset's economic activity.
Key Differences at a Glance
- Structure: Bonds = debt. Sukuk = asset ownership.
- Returns: Bonds pay predetermined interest. Sukuk pay distributions from real asset income.
- Risk: Bond investors bear credit risk only. Sukuk investors share in asset performance risk.
- Islamic compliance: Bonds are haram (riba). Sukuk are halal when properly structured.
- Liquidity: Government bonds are highly liquid. Sukuk market is smaller but growing.
Risk Profile Comparison
In a conventional bond, the investor bears credit risk but no asset risk. In a sukuk, the investor shares in the actual economic risk of the underlying asset. This aligns more closely with Islamic principles of risk-sharing and fair exchange.
Liquidity
Conventional government bonds are among the most liquid assets globally. The sukuk market, while growing rapidly past $700 billion in issuance, is still less liquid. This is an important practical consideration for investors who may need to exit positions quickly.
Which to Choose
For Muslim investors, the choice is straightforward: sukuk are compliant, conventional bonds are not. Within sukuk, focus on sovereign issuers from Malaysia, UAE, or Saudi Arabia for quality and liquidity.