Is Bond investment permissible?

Question:

Is it permissible to invest in bonds?

Answer:

In the Name of Allah, the Most Gracious, the Most Merciful.

 

As-salāmu ‘alaykum wa-rahmatullāhi wa-barakātuh.

Bonds are debt obligations under which the borrower, typically a corporation of governmental entity, agrees to make specified payments of interest for the money it borrows (the “face value”or principal).

For example, a corporation may issue a bond which will mature in 5 years with a face value of £1,000 and promise to make annual interest payments of 10% per year. In this case, the bondholder will earn £100 a year for five years and after the fifth year will be given back his or her initial investment of £1,000 as long as the corporation does not default. The interest / expected return of each of a bond depends on the degree of risk, which determined by independent ratings agencies. Bonds issued by governmental entities typically have a lower expected return than those issued by corporations since the chances of governmental entities defaulting are smaller.

Investing in Bonds is impermissible since they are essentially loans that promise to pay back the face value plus interest.

 

And Allah Ta’āla Knows Best

Mawlana Faraz ibn Adam,
www.darulfiqh.com

 

 

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