Islamic bonds or finance is governed by Islamic rules and principles (Shariah) which, inter alia, prohibit the payment of interest (Riba). Shariah also forbids the investment in businesses that provide goods and services considered contrary to its principles (Haraam), and this includes gambling and alcoholic beverages. However, Islamic bonds or finance encourages trading and business, but through risk and profit sharing participation in permitted activities. The Shariah-compliant bonds are often referred to as Sukuk and they either:
- are backed by returns from real assets (ownership right to tangible assets, a pool of assets, or the assets of a specific project) and earn a variable rate of return that is tied to the performance of the asset, or
- offer returns that are unspecified before the investment is made but shared based on a pre-agreed ratio on actual earnings.”
