Conventional Bond 

These bonds are fundamentally  loan contracts;  it does not give the investor a share of ownership in the asset project or business. A bond with option rights is called a warrant bond. For a limited time, it confers the right to buy equity securities, such as shares, of the bond issuer at a predetermined price (exercise price). Once the exercise period has begun, the investor can separate the warrants from the bond and sell them on the stock exchange. The bonds are then listed with the addendum “ex”. 

Issuers benefit because the interest rates on warrant-linked bonds are relatively low. Moreover, if the warrant is exercised, their shares will be sold to the investor at a relatively high price. Investors benefit from the fixed interest payments on warrant-linked bonds, and from a potential increase in the stock price. 

The payment for the bond is effectively a loan (Qard) from a Sharia perspective. Thus, any profit or additional return in lieu of the loan is impermissible and non-Shariah compliant. A famous juristic maxim states:  

“Any loan which draws an increment is Riba” (Ibn Abi Shaybah). 

Sharia Perspective: 

Many Sharia Scholars consider options – a right to buy/sell – as a mere promise. They argue that such promises cannot have any consideration in lieu of it as they are not property (Mal) nor valid rights (Huquq). The ‘right to buy’ is a commitment, pledge and promise to transact. Let alone being lawful commodities, promises are not even assets. Promises are merely an expression of commitment. The scholars state that in such a scenario and instance, a premium would be paid without any transfer of property, benefits or rights. Hence, when there is no counter-exchange being transferred, a premium would be unwarranted. As a consequence, the premiums paid for warrants fall under Rishwa (bribe) and prohibited. Rishwa refers to taking consideration for something which does not warrant a premium or consideration.

Download the paper to learn the alternatives that Sharia provides, ensuring issuers, investors can fulfil their financial needs in a Sharia compliant manner.