Does Sukuk Really Behave Like Bonds?
Sukuk is often described as the Islamic equivalent of a conventional bond - and for good reason.
It sits in the same part of a portfolio. It is issued by governments and large companies. It is designed to provide regular income and preserve capital. Structurally, however, it differs in one important respect: a conventional bond pays contractual interest, while sukuk is structured around ownership of assets or profit-generating activities, meaning returns are derived from profit rather than interest.
From a faith perspective, that distinction is fundamental. However, from the perspective of an investor looking for bond-like returns, the question is: how does sukuk’s performance actually stack up against conventional bonds?
What my research found is that recent data shows that the two move largely in tandem. Over the past year, global investment-grade sukuk delivered a return of 7.94%, compared to 8.56% for global investment-grade bonds. Over three years, though marginally sukuk outperformed, its performance was still broadly in vicinity of bonds’, 4.63% p.a. vs 3.19% p.a. respectively.
Performance during stress periods reinforces the comparison.
In 2022, when global interest rates rose at the fastest pace in decades, global bonds fell -16.25%, while global sukuk declined -12.12%.
The similarity is not accidental. Both markets are predominantly investment-grade, meaning relatively low default risk. Both generate most of their return from predictable income payments rather than rapid capital growth. And because both promise a stream of future cash flows with repayment at maturity, their prices are sensitive to changes in market interest rates. When rates rise, the present value of those future payments falls - whether those payments are labelled “interest” or “profit.”
Where modest differences emerge is in market composition. The sukuk market is more concentrated in Gulf countries and Malaysia, with heavier exposure to sovereign and quasi-sovereign issuers. This regional tilt means performance can be influenced at the margin by oil prices and fiscal conditions. In recent years, that exposure has been supportive: sukuk’s stronger three-year outcome reflects the relative resilience of Gulf sovereign credit profiles, bolstered by elevated energy revenues during the rate shock period.
Looking ahead, correlation with conventional bonds is likely to remain high - and may even increase - as more countries issue sukuk and the range of structures expands. As the issuer base diversifies and integrates further into global capital markets, sukuk becomes increasingly influenced by the same macro drivers: interest rates, inflation expectations and credit spreads.
That said, regulatory developments are worth watching. Ongoing refinements to AAOIFI Shariah standards particularly around asset ownership, risk transfer and purchase undertakings - could materially affect how sukuk are structured. If tighter requirements reduce the use of mechanisms that replicate conventional bond economics, sukuk may carry greater asset-level risk and therefore return than bonds.
For now, however, the evidence is clear. Sukuk behaves economically like investment-grade fixed income. The structure is different. The performance is largely similar.
*sources available on request*