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Thursday, 6 September 2007

Islamic bonds pass milestone


The fast-paced growth of sukuk Islamic bond issuance, which has made new records this year, is driven by a number of factors, ranging from interest among western institutions looking at a growing community of prospective Muslim customers of the future, to a continued economic and construction boom in the Middle East. The impressive expansion of the sukuk market represents an important milestone for Islamic finance in more ways than one. The growth comes as oil prices have been high in recent years - bringing unprecedented liquidity to the oil-rich Islamic region of the Middle East. According to the Islamic Finance Information Service (IFIS), the $24.5bn of sukuk bonds issued during the first half of this year have already come close to the $26.8bn for the whole of last year, which in itself was a record. IFIS says that total issues this year are expected to reach $50bn. The rising values of sukuk mark a phenomenal jump. Seven years ago issuance was just $336m. For Islamic finance, the growing value of new sukuk issues is significant not just because of the rapid growth in the size of this sector. An equally important element is the increased acceptability of sukuk bondsas an instrument worth pursuing for issuers as well as investors, as individuals and corporates gain more and more experience. Across the markets, both in Islamic and non-Islamic countries, the growth of Islamic finance still raises many questions. For sceptics of this relatively new industry, Islamic finance remains a peripheral area which is yet to become of central importance to global finance. While the sukuk market shows continued growth, sceptics are quick to argue that many of the issues are geographically limited to parts of the Middle East and east Asia, such as Malaysia, where Islamic finance has grown more than in other parts of the Muslim world. But dedicated and experienced practitioners rightly point towards the impressive pace at which the growth of this relatively recent emerging trend on the global scene demonstrates that it has come of age. There are several important reasons for optimism surrounding the growth of the sukuk. Ordinary Muslims still follow the view that Islam forbids investments in such obvious vices as alcohol, gambling, some types of hotel businesses and companies that are excessively indebted. Additionally, certain types of transactions based on speculation are prohibited. In spite of such inhibitions, Islamic finance practitioners are finding themselves better placed to interact with prospective takers of their line of business, with help from real life growth - most notably in the sukuk market. The opportunities offered by a growing list of conferences and seminars on this subject around the world help spread the word. Then there is the proliferation of information on Islamic finance both in print as well as via the internet, which has lifted the profile of this industry in more ways than one. For instance, just the way that there is growing interest in the business opportunities offered by halal or kosher food products serves to cater to those with an existing or prospective interest in this area. Some important myths have clearly begun changing. For instance, past impediments have included views such as the one that Islamic financial products typically must be accompanied by complex and very detailed documentation. Over time, issuers of, and investors in, a product such as sukuk bonds have learnt from experience that new issues are seldom as complex as some may have imagined - a trend that must help spur the growth of other Islamic products. The growth of sukuk has also been helped by intellectual contributions from the community of Islamic scholars involved in continuously reviewing religious principles surrounding finanacial transactions. But as opportunities grow, proponents of Islamic finance face a two-pronged challenge. On the one hand, they must demonstrate their ability to oversee fast growth for products other than just sukuk bonds. Important new products such as Islamic insurance, known as takaful, must demonstrate a faster paced growth. especially among business people keen to see growth of Islamic products, for there to be evidence of an all-encompassing growth rather than just selective improvement. On the other hand, it is also vital for the proponents of Islamic finance to back a significant improvement in the quality of discussion concerning this area across the Islamic world, raising emphasis on multilingual debate for the benefit of users. For too long, Islamic finance has remained a subject of discussion among the intellectual elite in addition to the selective community of those directly involved with its usage, notably individuals from the financial sector. For ordinary Muslims in many countries, myths associated with this subject continue to drive their sentiment more than the evolution of concepts and ideas from the continuing work of scholars. While many proponents celebrate the growth of areas such as sukuk, ordinary prospective customers in a number of Islamic countries are yet to receive a clear message on how they can embrace religious financial principles while carrying on their daily business. - (FT, 3 Sep 07)

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