Income bonds are offered as interest free, is it permissible for me to sign up?

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

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

An income bond or adjustment bond is a type of debt security in which only the face value of the bond is promised to be paid to the bondholder, with any coupon payments (interest) paid only if the issuing company has enough earnings to pay for the coupon payment.

This is different from a traditional corporate bond or government bond in which the issuer makes regular interest payments to bondholders and upon maturity, repays the face value of the bond. Bondholders expect to receive the stated coupon payments periodically and are exposed to a risk of default in the event that the company has solvency problems and is unable to fulfil its debt obligations. However, in an income bond, the issuer guarantees only the face value of the bond.

Thus, an income bond is not necessarily interest free, rather, they do not offer a fixed interest return. Interest is only paid in the event that the company makes profit.

As a bond is a loan given to the issuing company, the bondholder is a creditor. Thus, taking anything in exchange of that loan is impermissible. In the enquired scenario, although the interest to be paid is not certain, voluntarily entering into a contract in which there is a possibility of being paid interest is impermissible. Therefore, it will not be permissible to purchase an income bond.[i]

And Allah Ta’āla Knows Best

Mirza-Zain Baig

Student - Darul Iftaa

Montréal, Québec, Canada

Checked and Approved by,

Mufti Ebrahim Desai.

06-07-1441| 29-02-2020