The Role of Sukuk in Islamic Capital Markets
13
Bonds Sukuk Shares
Underlying
Assets
No asset is required for
unsecured bonds, i.e. the
bonds need not be backed
by any collateral. For
secured bonds, the
underlying assets backing
them may include non-
Shariah-compliant assets.
Underlying assets must comply with
Shariah requirements. Underlying
assets can represent both debt (arising
from Shariah-compliant activities) and
non-debt assets. Asset backing has
evolved from 100% of assets to
minimum levels of 51%, 33% or 30%.
In certain jurisdictions, it is acceptable
to have 100% of debt receivables and
no other asset.
Not required.
Asset-Related
Expenses
Bond holders are not
affected by asset-related
expenses.
Sukuk holders may be affected by asset-
related expenses.
None.
Status
Generally involves
unsecured creditors,
except if the bonds are
backed by specific assets.
Sukuk holders in asset-backed sukuk
have recourse to the assets in the event
of default, or if the issuers have
difficulty in repaying. They are ranked
senior to unsecured creditors. Holders
of asset-based sukuk are generally
ranked pari passu with other unsecured
creditors and have no recourse to the
assets.
Shareholders represent
the most junior in rank to
other classes of securities
with full or preferred
voting rights. Equity can
also be in the form of
preference shares, which
have near-senior claims
to dividends and capital.
Returns to
Investors
Coupon payments in the
form of interest
representing a
percentage of the capital.
They correspond to fixed
interest, connoted as riba.
Periodic payments represent a
percentage of actual profits (generated
from sale and partnership contracts)
and rental income (generated from
lease contracts).
Shareholders receive
dividend payments.
These are not guaranteed
by the corporation.
Principal
Repayment by
Issuers
Return of principal at
maturity is an irrevocable
obligation, irrespective of
whether the funded
project is profitable.
In principle, there is no ex-ante fixed
obligation of capital repayment for
equity-based contracts. There are
usually repurchase undertakings or
dissolution provisions to guarantee
capital repayment under ijarah and
other structures.
None, as shares represent
perpetual instruments.
Utilization of
Proceeds
No specific requirement.
Bonds can be issued to
meet any financing needs
that are legal in the
jurisdiction of the issuer.
Proceeds must be used to finance
Shariah-compliant activities.
Equity can be issued to
meet any financing need
of the corporation.
Tradability in
Secondary
Market
Selling bonds represent a
sale of debt.
Selling sukuk is basically the sale of a
share in an asset or a project. Shariah
standards at the global level (e.g.
AAOIFI) only allow the sale of tangible
assets, some intangible assets and
interests in ventures, whereas Malaysia
allows the sale of debt (for sale-based
sukuk).
Represents a sale of
shares in the company.
Pricing
Bond pricing is based on
the credit rating of the
issuer as well as terms
and conditions, usually a
spread over a reference
interest rate.
Sukuk pricing depends on the structure
of the sukuk. For non-recourse asset-
backed sukuk, pricing is based on the
asset backing the sukuk. For sukuk
structured based on fixed-income and
debt-creating contracts, their pricing is
typically similar to bond pricing, but
may be affected by factors that include
market depth/breadth, liquidity and
complexity.
Pricing is tied to the
performance of the
corporation.
Source: ISRA (2017: 31-33)