Sukuk

If we had to pick two—and only two—pieces of knowledge that have really stuck with us over the years, we’d have to go with these two:

1. The key to investment success is a diversified portfolio.

2. Mitochondria is the powerhouse of the cell.

But, uh...back to that first one. One of the ways many investors diversify their portfolio is by buying and selling bonds. But what if bonds aren’t an option? What if our religion thinks bonds are no good?

This is the situation faced by Islamic investors who follow sharia law. Bonds earn interest, and interest (called “riba”) is a no-no under sharia law, so buying and selling bonds is highly problematic. Enter the “sukuk,” which is kind of like a bond, but it’s sharia-compliant. Instead of earning interest, people who buy sukuks are actually buying a portion of ownership in that asset. When that asset—let’s say it’s a business—makes money, sukuk owners receive a portion of the profits. After a predetermined amount of time, the entity that issued the sukuk buys it back, and everyone goes their merry way.

Sukuks can’t be tied to assets or companies that deal with non-sharia-compliant products or services. This means no breweries or distilleries, no tobacco companies, no casinos or gambling apparatus producers, no film studios that produce adult films, no food companies that sell pork, etc. They’re a great alternative for the conscientious investor who wants to diversify their investments...while still adhering to Islamic religious law.