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What is the diffeence between debentures and Sukkuk?

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Question added by Malik Khalid Mahmood , Regional Finance Manager , Leosons International FZ LLC
Date Posted: 2014/10/28
SREEDEVI SUNILKUMAR
by SREEDEVI SUNILKUMAR , Business finance officer , Emirates Airline

SUKUK

An Islamic financial certificate, similar to a bond in Western finance, that complies with Sharia, Islamic religious law. Because the traditional Western interest paying bond structure is not permissible, the issuer of a sukuk sells an investor group the certificate, who then rents it back to the issuer for a predetermined rental fee. The issuer also makes a contractual promise to buy back the bonds at a future date at par value.

Sukuks must be able to link the returns and cash flows of the financing to the assets purchased, or the returns generated from an asset purchased. This is because trading in debt is prohibited under Sharia. As such, financing must only be raised for identifiable assets.

Debenture

A type of debt instrument that is not secured by physical assets or collateral. Debentures are backed only by the general creditworthiness and reputation of the issuer. Both corporations and governments frequently issue this type of bond in order to secure capital. Like other types of bonds, debentures are documented in an indenture.

Debentures have no collateral. Bond buyers generally purchase debentures based on the belief that the bond issuer is unlikely to default on the repayment. An example of a government debenture would be any government-issued Treasury bond (T-bond) or Treasury bill (T-bill). T-bonds and T-bills are generally considered risk free because governments, at worst, can print off more money or raise taxes to pay these type of debts.

 

Tanveer Qureshi
by Tanveer Qureshi , Qureshi Associates , Qureshi Associates

Sukuk

Modern sukuk emerged to fill a gap in the global capital market. Islamic investors want to balance their equity portfolios with bond-like products. Because sukuk are asset-based securities — not debt instruments — they fit the bill. In other words, sukuk represent ownership in a tangible asset, usufruct of an asset, service, project, business, or joint venture.

Each sukuk has a face value (based on the value of the underlying asset), and the investor may pay that amount or (as with a conventional bond) buy it at a premium or discount.

Most sharia scholars believe that having sukuk managers, partners, or agents promise to repurchase sukuk for the face value is unlawful. Instead, sukuk are generally repurchased based on the net value of the underlying assets (each share receiving its portion of that value) or at a price agreed upon at the time of the sukuk purchase.

In practice, some sukuk are issued with repurchase guarantees just as conventional bonds are. Although not all sharia scholars agree that this arrangement complies with Islamic law, a product called sukuk ijaramay come with a repurchase guarantee.

Debenture:

In corporate finance, a debenture is a medium- to long-term debt instrument used by large companies to borrow money, at a fixed rate of interest. The legal term "debenture" originally referred to a document that either creates a debt or acknowledges it, but in some countries the term is now used interchangeably with bondloan stock or note. A debenture is thus like a certificate of loan or a loan bond evidencing the fact that the company is liable to pay a specified amount with interest and although the money raised by the debentures becomes a part of the company's capital structure, it does not become share capital. Debentures are generally freely and debenture holder has no right to vote in the company's general meetings of shareholders, but they may have separate meetings or votes e.g. on changes to the rights attached to the debentures. The interest paid to them is a charge against profit in the company's Financial Statement.

 

Abdallah Abu Zeyad CMA
by Abdallah Abu Zeyad CMA , Finance Account Manager , Toyota - Abdul Latif Jameel Motors - KSA

Sukkuk : Islamic bonds, structured in such a way as to generate returns to investors without infringing Islamic law (that prohibits riba or interest).

 

Debenture is a medium- to long-term debt instrument used by large companies to borrow money, at a fixed rate of interest. The legal term "debenture" originally referred to a document that either creates a debt or acknowledges it, but in some countries the term is now used interchangeably with bondloan stock or note

georgei assi
by georgei assi , مدير حسابات , المجموعة السورية

For a written promissory note issued by the creditor to the debtor's request for the payment of a certain sum to the creditor or to a third person and that the beneficiary is found immediately or at a specific date 

Bonds: The company is a commitment to pay off at maturity · bond yields: a fixed dividend paid each patrol period

FITAH MOHAMED
by FITAH MOHAMED , Financial Manager , FUEL AND ENERGY CO for transportion petroleum materials

AGREE WITH MRS SREEDEVI  

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