LISTEN TO THIS ARTICLE
Sukuk bonds, often referred to as Islamic bonds, are debt securities that comply with Sharia principles, the Islamic law. Unlike conventional bonds that involve interest payments, which are prohibited in Islam, Sukuk bonds are structured to avoid interest-bearing transactions.
What are Sukuk Bonds?
Sukuk bonds represent ownership of an underlying asset, such as real estate, commodities, or infrastructure projects. These assets generate income, which is then distributed to the Sukuk holders.
Some of the key features of the bonds are enumerated below:
- Sukuk bonds are Sharia-compliant. They adhere to Islamic principles, making them suitable for investors seeking ethically and religiously aligned investment options.
- They achieve the investment goal of diversification. Sukuk bonds can be issued against a wide range of assets, providing investors with diverse investment opportunities.
- There is a potential for higher returns. Depending on the underlying asset, Sukuk bonds may offer competitive returns compared to conventional bonds.
- While liquidity can vary depending on the specific Sukuk issue, the market for Sukuk bonds is growing, enhancing liquidity and trading opportunities.
- The bonds carry a relatively lower risk than stocks, as they are backed by fixed assets which are not very sensitive to macroeconomic shifts.
For further details, please see https://www.dfm.ae/investing/products/sukuk-bonds.
Sukuk Bonds in the Middle East
The Middle East has emerged as a significant hub for Sukuk issuance. Several factors contribute to this growth. A significant portion of the population in the Middle East adheres to Islamic principles, creating a strong demand for Sharia-compliant financial products. The region has experienced substantial economic growth, driving the need for infrastructure development and financing.
Many governments in the Middle East have actively supported the development of the Sukuk market through regulatory frameworks and policy initiatives. For instance, the ‘T-Sukuk’ are Islamic Sharia-compliant financial instruments issued by the federal government of the UAE denominated in the local currency AED. Any natural or legal person can invest in these securities. For further details, please see https://mof.gov.ae/local-currency-islamic-sukuk-issuance/.
What’s in for the investors?
Sukuk bonds have emerged as a viable alternative investment option. These bonds offer unique advantages such as portfolio diversification and liquidity, making them attractive to investors seeking Sharia-compliant instruments or those looking to expand beyond traditional asset classes.
Further, Sukuk bonds provide fractional investment opportunities in certain cases. This feature reduces the ticket size of the investment, allowing small investors to access a market dominated by institutional players or high-net-worth individuals.
It is important to note that like other investment instruments, these bonds are also subject to market risks, including economic fluctuations and geopolitical uncertainties. Despite these challenges, they remain an appealing option for investors seeking diversification and the potential for steady returns within a balanced portfolio.
Disclaimer: Content posted is for informational and knowledge sharing purposes only, and is not intended to be a substitute for professional advice related to tax, finance or accounting. The view/interpretation of the publisher is based on the available Law, guidelines and information. Each reader should take due professional care before you act after reading the contents of that article/post. No warranty whatsoever is made that any of the articles are accurate and is not intended to provide, and should not be relied on for tax or accounting advice
