Islamic Bond Decree Cripples Sukuk, Imperils Projects

Strict interpretation of Islamic law discourages interest payments associated with debt. Banks in fast-growing areas of the Middle East, like Dubai, created a special group of bonds – or sukuk market – described as Shariah-compliant, which allow payment through the exchange of assets rather than money. Bonds, as instruments of debt, raise capital and spur development of property, and unlike stocks, allow the borrowers to maintain ownership. But “a Bahrain-based group of Islamic scholars decreed in February that most bonds ran afoul of religious rules,” because they did not shift “ownership of collateral to holders,” reports Haris Anwar for Bloomberg. The ruling resulted in higher interest rates, a slowdown in development and a drop in property prices for the region. Consultants for global banking firms like HSBC and Citibank rely on religious consultants to devise and review debt instruments for the religious and wealthy of the Middle East. Analysts suggest that investors dislike the uncertainty of the sukuk market, even though the religious rules have been in place for nearly 14 centuries. – YaleGlobal