Bonds and Sukuk: Differences and How to Invest in Malaysia
•By Mahersaham Team
Artikel ini juga tersedia dalam Bahasa Melayu
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According to Bond Pricing Agency Malaysia Sdn Bhd (BPAM), the local market for bonds and sukuk remains an attractive investment asset for foreign investors.
This is due to the positive returns, making local bonds and sukuk a better choice compared to other countries.
What exactly are bonds?
A bond is an instrument issued by a borrower to raise a large sum of funds from investors.
The borrower can be a corporate institution, the government, or a municipality.
Unfortunately, most banks are unable to provide such loans due to the excessively large loan amounts and limited resources.
Investors choose bond instruments because they promise a fixed income known as a coupon.
Investors are also promised the return of the principal amount borrowed upon maturity.
The bond issuer is responsible for repaying the debt as they have committed to paying coupons periodically, and the principal (capital) will be repaid at maturity.
Bond issuers can face legal action if they fail to fulfil their obligations.
Did you know that there are 2 types of bonds in the market, namely government bonds and corporate bonds?
Government bonds are debt securities issued by the government for the purpose of development expenditure, covering the construction of schools, roads, hospitals, and utility infrastructure.
Investors choose government bonds as a safe investment because they are trusted and carry low risk.
Corporate bonds, on the other hand, are debt securities issued by companies for the purpose of business operations.
However, conventional bonds involve elements of riba (usury) in their implementation, which is strictly prohibited in Islamic teachings.
Next, what exactly is sukuk?
Are sukuk and bonds the same thing?
Sukuk is an Islamic financial instrument whose purpose is similar to bonds.
However, it is based on Shariah principles, and this is what differentiates sukuk from conventional bonds.
Funds raised from sukuk issuance must be used for purposes that do not contravene Shariah principles.
For your information, Malaysia is one of the largest sukuk issuers in the world.
Sukuk issuance must be based on these 3 principles:
• Sukuk is a fund instrument for business or asset development.
• Sukuk is a claim on assets from the proceeds of asset returns, not debt.
• It is a Shariah-compliant Islamic financial instrument.
According to the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI), there are 14 types of sukuk in the market, each differing in terms of Shariah principles and processes.
Among them are Sukuk Ijarah, Sukuk Salam, Sukuk Istisna, Sukuk Musyarakah, Sukuk Wakalah, and Sukuk Mudharabah.
In terms of the formation process, bonds are simpler and more straightforward to create compared to sukuk.
From the investor''s perspective, sukuk has an advantage because all types of investors — whether conventional or Islamic — have the opportunity to invest in sukuk.
Furthermore, sukuk prices are more stable because they are based on business assets, whereas bond prices fluctuate because they are not backed by assets.
According to BPAM, as of June this year, foreign holdings in local bonds and sukuk remained stable at approximately 37% of the total outstanding value of Malaysian bonds and sukuk.
The Malaysian bond and sukuk market continues to demonstrate its importance and serves as a key pillar of the capital market, financing the real economy and the nation''s infrastructure needs.
Bonds are conventional debt instruments that may involve riba (interest), while sukuk are Shariah-compliant Islamic financial instruments. Sukuk are backed by tangible assets and their returns come from asset proceeds rather than interest payments.
Government bonds are generally considered low-risk investments because they are backed by the government. They provide a stable fixed income through coupon payments and the principal is returned at maturity.
Malaysia is one of the largest sukuk issuers in the world due to its well-established Islamic finance ecosystem, strong regulatory framework, and diverse types of sukuk offerings including Sukuk Ijarah, Sukuk Salam, and Sukuk Musyarakah.
Yes, sukuk is open to all types of investors — both conventional and Islamic. This is one of the advantages of sukuk, as it attracts a wider investor base compared to conventional bonds.
Understanding the differences between bonds and sukuk helps you make informed investment decisions that align with your financial goals and principles.
Download our free investment basics ebook to learn the fundamentals of investing in Malaysia.
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