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Islamic loans drop after sharia ruling

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Points of Essence:

  • Bahrain based prominent Shariah scholars have ruled unlawful Islamic bonds (sukuk) issued by  some banks in the Middle East causing a severe dent by 50% in the sukuk demand from the region ever since.
  • The scholars ruled that many sukuk are are unlawful as they do not involve a transfer of tangible assets. The Accounting & Auditing Organisation for Islamic Financial Institutions (AAIOFI) said only 85% of all Islamic bonds issued by global banks met their rigorous standards earlier this year.
  • The ruling was a strong reminder for banks not to take the Shariah approval for granted.

By Rowena Mason
Last Updated: 8:06pm BST 03/09/2008

Islamic loans thought to be compliant with strict sharia law on investment have dropped by 50pc in the Middle East since some services offered by banks were ruled unlawful by experts.

The Accounting & Auditing Organisation for Islamic Financial Institutions said only 85pc of all Islamic bonds issued by global banks met their rigorous standards earlier this year.

Muslims are not allowed to earn interest on loans or profit from money invested in gambling, alcohol or guns.

Specialist bonds known as sukuk satisfy Islam’s ban on interest by allowing investors to profit from the exchange of assets, rather than money, but Bahrain-based scholars ruled that many are unlawful because they do not involve a transfer of tangible assets.

The sukuk market, which financed Dubai’s Palm Island development – where David Beckham and Donald Trump have homes – had been doubling since 2004. However, sales declined to $11bn (£6bn) from January to August this year, compared to $21bn during the same six months in 2007.

“The demand for sukuk has reduced since this ruling,” said Amjad Hussain, head of banking and Islamic finance in the Middle East for Eversheds.

“The ruling was made by one of the most eminent scholars in this area and people are listening to him. Those banks that have taken Shariah approval for granted are having to think much more carefully.”

Figures show that Middle Eastern companies raised $50bn this year in loans, compared with $73bn during the same period of 2007.

However, Accenture’s head of capital markets research, James Sproule, who wrote a report on Islamic finance this year, believes that products will evolve to meet religious standards.

He said: “I’m not an Islamic scholar, but as an economist, I think the market will establish by itself the desired standard. We are only at an early stage of development in Islamic financing.”

Source: http://www.telegraph.co.uk

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Written by Suapi Shaffaii

September 4, 2008 at 2:40 pm

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