UAE Laws and Islamic Finance

Laws of the UAE and Islamic Finance

Sukuk v Bonds v Shares

In finance, a bond is a debt security, in which the authorized issuer owes the holders a debt and depending on the terms of the bond, is obliged to pay interest (the coupon) and/or to repay the principal at a later date, termed maturity. A bond is a formal contract to repay borrowed money with interest at fixed intervals.[1]

Thus, a bond is like a loan: the issuer is the borrower (debtor), the holder is the lender (creditor), and the coupon is the interest. Bonds provide the borrower with external funds to finance long-term investments, or, in the case of government bonds, to finance current expenditure. Bonds must be repaid at fixed intervals over a period of time. (Wikipedia)

According to the Accounting and Auditing Standards for Islamic Financial Institutions, AAOIFI (, Sukuk are “Certificates of equal value representing, after closing of subscription, receipt of the value of the certificates and putting it to use as planned, common little to shares and rights in tangible assets, usufructs and services, or equity of a special investment activity.”   The principle of fixed return does not apply to Sukuk, however, Sukuk holders may get the fixed return due to the underlying asset or project.  The projects may be guaranteed income and some are derived from the actual cash flow of the project.

In financial markets, a share is a unit of account for various financial instruments including stocks (ordinary or preferential) and investments in limited partnerships and real estate investment trusts. The common feature of all these is equity participation (limited in the case of preference shares). (

A bond can be considered a certificate of indebtedness whereby the issuer is obligated to pay the holder a specific sum of money either semi-annually or at maturity.  The paid sum consists of both the principal and interest irrespective of whether it is zero, coupon bond, or bond with coupon.  The difference between bondholders and stockholders is that the bond holder has a claim against the issuer but has no ownership rights while stockholders have ownership rights.  (Except Convertible Bonds).

In regards to stocks, Investors were given share certificates as evidence of their ownership of shares but certificates are not always issued nowadays. Instead, the ownership may be recorded electronically by a system such as CREST. (wikipedia)

Under a Sukuk structure, the Sukuk holders each hold an undivided beneficial ownership interest in the underlying assets.  Sukuk holders are entitled to a share in the revenues generated by the Sukuk assets.

*Information taken from materials handed out at the Amanie Islamic Finance School Workshop in Dubai, UAE on December 14-15, 2008 and Wikipedia.

UAE Laws and Islamic Finance

Laws of the UAE and Islamic Finance

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