Quora Answer: How Do Swak, Islamic Bonds, Comply with Shari’ah, Given that Islam Forbids Paying Interest?

بِسۡمِ ٱللهِ ٱلرَّحۡمَـٰنِ ٱلرَّحِيمِ

The following is my answer to a Quora question: “How do swak, Islamic bonds, comply with shari’ah, given that Islam forbids paying interest?” 

It is simplistic to believe that Islamic finance forbids the paying of interest, since it equates any form of payment labelled as interest with riba’.  But that is a different discussion.  Swak, the plural of swukuk, are not real debt instruments, and thus, do not pay interest on lending.  Bonds are debt instruments, and the interest is upon the debt.  Swak are not bonds since it is priced based on an underlying asset, not a debt.  The dividend is based on future cash flow.  This means that the swukuk value may vary over a period depending on the appreciation or depreciation of the underlying asset.  A bond’s value is not upon the underlying asset, and the value does not change except through demand in the secondary market.



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