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Sunday, 14 September 2008

Special Report: Banking - The rise of Islamic finance

Source: MEED

Since questions were raised earlier this year over the compliance with sharia law of a common form of sukuk (Islamic bond), doomsayers have warned of the impending demise of Islamic finance.

In April, the Accounting & Auditing Organisation for Islamic Finance Institutions, the industry's Bahrain-based watchdog, said that a certain sukuk type, which guarantees the price at which an issuer buys back an asset, contravened the principle of risk and reward sharing at the heart of Islamic banking.

But the latest global sukuk issuance figures run against the idea that this is an industry in its death throes. In the first seven months of 2008, $73bn worth of sukuk were issued worldwide, compared with $61.8bn in 2007 and $27.5bn in 2006, according to figures released in September by ratings agency Standard & Poor's. Islamic finance is experiencing a short-term dip, but this is in line with the current suspicion of capital markets afflicting the wider finance world.

This is not to say that more scrutiny is not needed to ensure the industry's future growth. The high-profile success of sukuk in recent years, and the consequent involvement of mainstream financial institutions, has been, and will continue to be, a good thing for Islamic finance. But more research and development is undoubtedly needed to stress-test new products.

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