Ruling Puts Damper on Islamic Bond Issuance

Bloomberg has an interesting piece highlighting a sharp drop in the issuance of Islamic bonds.

The so-called sukuk market, which has doubled each year since 2004 and grown to $90 billion, is declining after a Bahrain-based group of Islamic scholars decreed in February that most bonds ran afoul of religious rules. Only one that complies with the edict has been issued, pushing up borrowing costs on projects including $200 billion of real-estate developments in the United Arab Emirates capital. Bloomberg reports:

Sales of Shariah-compliant debt, which financed Dubai’s Palm development, the world’s largest man-made island and where David Beckham and Donald Trump have homes, fell 50 percent in 2008 and prices dropped an average 1.51 percent, according to HSBC Holdings Plc index data.

The Accounting & Auditing Organization for Islamic Financial Institutions ruled in February that bonds don’t meet religious requirements if they haven’t transferred ownership of collateral to holders. About 85 percent of sukuk failed this test, the board said. Under the new rules, a sukuk issuer passes ownership of an underlying asset, such as a building, to the investor for the bond’s duration. Should the price of the asset rise or fall, the change will be reflected in the bond’s value. Buyers can’t be guaranteed the security’s full face value on maturity. Before the new rules, investors weren’t the legal owners of the underlying assets and were effectively lenders to the issuer.

Earlier this year both the International Monetary Fund and Moody’s issued reports charting on the dramatic growth in the sukuk market in recent years.

Comments

[notsosmart:]

do greed & religion mix? they are not supposed to.but the shennanigans try by all sorts of rules,bypasses etc.well,now that has come to an end.(unless new shennanigans are found).if you are religious & cant collect interest dont lend money.wow-is it really hat simple?

2008 Sep 06 12:24 PM

[mdmrjsds:]

notsosmart wrote:
...if you are religious & cant collect interest dont lend money.wow-is it really hat simple? ...

No, it isn't, unfortunately. This is one reason that Islamic societies are underdeveloped and despotic. No private capital markets can develop, so no private industry can develop, so people can't better themselves easily. Social rigidity and societal stratification result.

Muslims are taught from birth that Islam is perfect. And this experience contradicts that, shows that it can't compete on the world economic stage, generating cognitive dissonance. It has lots of negative social implications for the people living there as well (2/3 of the world's poor are Muslims). The poverty generates ignorance and social unrest. We all pay for that, not only them.

So it seems like a simple thing, but it has profound implications.

2008 Sep 06 01:55 PM

[mdmrjsds:]

The statistic on poverty is wrong. It should be that 2/3 of *Muslims* are poor.

2008 Sep 06 01:58 PM

[notsosmart:]

if you are very religious you should be happy even if you are poor. 1/3 of muslims must be rich re above so they are very happy.

2008 Sep 06 04:46 PM

[Steven Hansen:]

yah know, a lot of the world does not have lien laws. things are built when they have the money, and construction stops when money runs out.

the statistic on 2/3 of muslims being poor is misleading. simply remove indonesia from the list and whammo - you have a significantly different result.

finally, i do not understand why it must be shenanigans or whatever derogatory word can be conjured up. the main thrust of islam is the avoidance of usury (neither a borrower or lender be). the exact mechanisms are always subject to religious review.

as a Christian, it is amusing to me how our own religious restraints are unnoticed by ourselves. islam has no laws prohibiting stem cell research or birth control.

2008 Sep 07 05:03 AM