How Sukuk is different from bonds

Sukuk is popularly known as the Islamic version of bonds.

It is the Islamic way to finance projects and businesses.

Bonds are simple debt securities where the issuer collects money from investors and pays them interest over the tenure of a bond.

On the other hand, Sukuk is Shariah-compliant as its investors do not get direct interest which is prohibited in Islam.

Instead, the beneficiary of a Sukuk, either pays rents against the infrastructure it gets out of the investors' money or shares profits with investors who financed his or her business operations.

Investment banker Ershad Hossain, the key expert behind Beximco Green-Sukuk Al Istisna, said Sukuk has different types and names. Purpose defines the structure of a Sukuk, while the contracts between parties define their nature.

Istisna and Ijarah Sukuks finance infrastructure projects of an entity, while Mudaraba, Murabaha and Musharaka Sukuks usually finance working capital in an Islamic way, which necessarily needs sharing both profits and losses in business.

In Istisna and Ijarah, the asset-backed Sukuks, a special purpose vehicle (SPV) entity, is needed between the investors and the beneficiary entity. SPV becomes the issuer of a Sukuk, while the beneficiary is technically called the originator of the Sukuk.

In Ijarah, the originator owns the assets bought or built with the Sukuk fund. It pays rent to the investors through the SPV until it pays the principal back after the Sukuk's maturity.

In Istisna Sukuk, SPV owns the asset, originator or beneficiary uses that and pays rent to the SPV for distributing the amount among investors. After maturity, SPV gets the principal back from the originator, transfers the asset ownership to the originator and pays back the investors' principal.

Ershad Hossain, the managing director of Beximco Sukuk's lead issue manager City Bank Capital Resources, said, Sukuk is not another name of a bond, the two have big differences in nature and structure.