Sukuk look like bonds from a distance. Both pay regular distributions on a fixed schedule. Both have a stated maturity. Both trade on secondary markets where they exist. The structural differences underneath matter, especially for an investor evaluating credit risk and Sharia compliance together.
Difference 1: backing. A conventional bond is unsecured debt of the issuer or, in the secured case, claims on specific collateral. A sukuk is a certificate representing ownership of an underlying asset or pool of assets (real estate in a Sukuk al-Ijara, a business venture in a Sukuk al-Mudarabah, a partnership in a Sukuk al-Musharakah). The holder owns a slice of the asset, not a claim on the issuer.
Difference 2: ownership stake. Bond holders are creditors with no equity participation. Sukuk holders have a proportionate ownership interest in the underlying. In an asset-backed structure they share in upside and downside of the asset value at maturity; in a Wakalah structure they own a pro rata share of an investment portfolio managed by the issuer as agent.
Difference 3: source of returns. Bond coupons are interest payments; the issuer pays a fixed rate regardless of how the issuer's operations perform. Sukuk distributions come from the cash flows of the underlying asset: rent on a leased property (Sukuk al-Ijara), profit share on a venture (Sukuk al-Mudarabah), partnership distributions (Sukuk al-Musharakah). The distribution is a return on ownership, not an interest payment.
Difference 4: default treatment. Bond default triggers the standard creditor waterfall: secured creditors first, then unsecured. Sukuk default treatment depends on the structure. Asset-backed sukuk give holders direct claim on the underlying; the asset is sold and proceeds distributed. Asset-based sukuk (more common in practice) give holders a contractual claim against the issuer like a bond, with the asset serving more as legal form than economic security. Investors should read the prospectus to determine which structure applies.
Difference 5: tradability. Bonds trade freely in secondary markets. Sukuk tradability depends on the underlying. Sukuk backed by tangible assets are tradable at any market price. Sukuk backed by debt receivables (Murabaha receivables, for instance) are generally not tradable at a discount or premium under most AAOIFI methodologies; trading them at par is acceptable but the secondary market is thin. Sukuk al-Ijara are the most actively traded; Sukuk al-Murabaha the least.
Practical implication. An investor using both is not getting two flavors of the same exposure. The credit, structural, and Sharia profile diverges across the sukuk types and from bonds. Read the prospectus.
This article is editorial structural comparison; not Mufti-attributed.