Understanding Islamic Bonds

Islamic bonds are a type of security that work differently than traditional bonds. They are also referred to as Sukuk. This is a term that essentially means financial certificate in Arabic. Islamic bonds are not used in the same way that traditional bonds are used. Under Islamic law, the charging of interest is strictly prohibited. Therefore, you cannot receive interest from this type of bond. Because of this, they will structure the bond differently so that they can adhere to Islamic rules. Currently, Islamic principles govern over a large portion of assets in the world. There is over $1 trillion worth of money that is utilized in this fashion.

Structure

Regular bonds are essentially a debt that is going to be repaid by the entity that issues it. However, with Islamic bonds, this is not the case. Instead, they will give you a piece of ownership in something. The company can structure the payments so that they are structured as rental payments, instead of interest. With this provision, investors and companies can get around the prohibition of paying interest. 


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