Islamic investors snap up sukuk ijara as risks grow: Alibaba

KUALA LUMPUR, March 17 - As the global downturn drags on, battering investor confidence and asset values, Islamic finance markets are expected to increasingly favour the certainty of lease-based bonds over profit-sharing structures to minimise risks.

With key sectors such as Dubai property and Malaysian manufacturing in a slump, Islamic banks have grown wary about financing through the once-popular musharaka structure that requires lenders to share a project's risks and rewards.

"Musharaka-based sukuk involve market exposure and not solely exposure to default risk as with ijara sukuk," said Rodney Wilson, an Islamic finance specialist with the Qatar Foundation.

"Given the current uncertainty in equity markets I do not believe many potential sukuk investors would want musharaka sukuk in present circumstances. If the market revives and confidence is restored, this may change, but this is unlikely in 2009."

Issuers and investors are expected to lean towards ijara or rental-based financing where possible, or look to create new lending structures in the $100 billion sukuk, or Islamic bonds, market.

In musharaka, parties contribute capital to a venture with profits to be shared according to an agreed ratio, while losses are generally divided as per the capital contribution ratio.

Sukuk ijara, rental bonds that are embraced by sharia scholars worldwide, were the most popular form of Islamic bond last year, according to rating agency Moody's.

For more on this article, please click on the following link: Islamic investors snap up sukuk ijara as risks grow: Alibaba