What is the advantage of sukuk compared to conventional bond?
Sukuk is based on an underlying transaction which creates a close link between financial and productive flows. The financing must be channeled for productive purposes such as project financing, rather than for speculative activities. Thus, the risk exposure is to the project and not to the uncertainties or activities that have no real economic benefits. This contributes to greater stability of the financial system. Moreover, under the risk sharing principle required, there is an explicit sharing of risk by the financier and the borrower. This arrangement will entail the appropriate due diligence and the integrating of the risks associated with the real investment activity into the financial transaction. The real activity is expected to generate sufficient wealth to compensate for the risks. In contrast, conventional bonds generally separate such risks from the underlying assets. As a result, risk management and wealth creation may, at times, move in different or even opposite direction
