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Monday, 24 September 2007

Sukuk: New buzzword for Islamic finance

The market for Sukuk (Islamic bonds) is booming, and the Gulf region is a big part of it. According to an Islamic finance expert, interest in Sukuk issuance is growing even more in the region. “Statistics show that Islamic Sukuk issuance in the Gulf and other Arab countries have reached $14 billion by the first quarter of 2006. While the Sukuk's average growth rate in the Gulf has reached almost 45 per cent from 2001 till 2005," said Dr Abdulaziz Al-Qassar, Shariah Advisor, Real Estate Bank of Kuwait in a seminar organised by the Institute of Banking Studies on Monday night. "Sukuk issuance is expected to reach $100 billion in the next five years," he added. The seminar shed light on the definition of Sukuk, its different types and future challenges facing the market. Sukuk represents a new development in global capital market; it is one of the fastest growing sectors in Islamic financing. According to market reports, Islamic finance market has grown over the last decade by more than 20 per cent per year, while as of February 2007, it is worth from $200 billion to $400 billion worldwide. "The importance of Sukuk lies in its ability to transfer assets into liquidity without the need to go into long legal complications for the investor," said Al-Tawari. "(Sukuk) are also a source of cashflow and finance for the originator," he added. Any assets can be transferred into sukuk, with the condition that at least 51 per cent of the underpinning assets must be leased-back as 'real assets' (ie not debt instruments). However, it is important to note that Islamic finance is governed by Islamic jurisprudence (Fiqh Al-Muamalat), which explains the contracts and trading deals that are halal (permissible) or haram (invalid). The assets that will be converted into Sukuk must be obtained from an Islamically acceptable deals, meaning not investing in any transactions against the Islamic Sharia principles (ie no riba or interest, pork, alcohol, or gambling). Talking about the humble beginnings of modern Islamic finance back in the 1970s - the first Islamic bank was established in Egypt in 1971 - Al-Tawari tracked the development of the industry which has grown significantly in size in almost 75 countries across four different continents. "The market needs to be aware with the importance and structure of Sukuk," said Al-Tawari. "There are still no legal principles to govern the Sukuk issuance," he concluded. - (Kuwait Times)

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