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

Sukuk Ijara, the world’s top Islamic bond: The Peninsula

Source ::: REUTERS

Sukuk ijara, a form of Islamic bond, became the dominant bond structure in the $1 trillion Islamic finance industry in 2008, ratings agency Moody’s said in a recent report. Bumper oil earnings in the Gulf and rising demand for ethical investments have boosted the profile of the three-decade-old Islamic finance industry in recent years from a niche sector to one with growing international reach. But Shariah debt issuance shrank in the past year as the global credit crisis slashed asset values and battered investor confidence. Here are some questions and answers about Sukuk Ijara and the sector.

WHAT IS SUKUK?

Sukuk are Shariah-compliant bonds that do not pay interest. There are different structures, but in general, Sukuk are certificates of equal value representing undivided shares in ownership of tangible assets, usufruct and services. Islamic principle forbids charging interest (riba).

WHAT IS SUKUK IJARA?

Under this structure, the seller sells assets to the issuer who will issue Sukuk to fund the purchase. The Sukuk represents beneficial rights in the assets and Sukuk holders have an undivided proportionate beneficial interest in the assets.

WHY IS IJARA SO POPULAR?

Its simple structure and the wide range of assets that it can be structured with make it attractive. Both governments and corporates can issue Ijara. Ijara’s popularity has also surged after landmark 2008 ruling by a top Islamic finance body that some hugely popular profit-sharing structures were not Shariah compliant.

For more on this article, please click on the following link: Sukuk Ijara, the world’s top Islamic bond: The Peninsula

Islamic Banking and Finance: Historical Perspective and Future Prospects: Economistan

Islamic banking and finance had its major beginnings in the year 1975 with the establishment of the Islamic Development Bank. Islamic banking has flourished in various countries since then with Malaysia, Indonesia, UAE, Pakistan and Saudi Arabia being in the forefront. Islamic banking has also recently done rather well in non-Muslim countries with the reported size of UK Islamic banking overtaking that of majority Muslim countries like Pakistan. Islamic banking assets are thought to be anywhere from 700 billion dollars to 900 billion dollars as of 2009. The credit crunch that has affected much of the western world has not taken its toll on the Islamic Banks, mainly because of the nature of the underlying transactions which admonish Riba and encourage instead a partnership based approach. The result is that the actual profit or loss is shared with the shareholders rather than an arbitrary number called Riba or “interest” which they have to come up with to please the investors regardless of the market situation. In this way, Islamic Banking also helps in depicting the true state of the economy.

Islamic indices historically have also been outperforming the other indices with the Dow Jones Islamic Developed World Index outperforming the MSCI World Index consistently over the past few years. Growth in Islamic banking has also been stellar and it has been growing at a healthy rate of 15-20% per year according to estimates. Moody’s has projected that Islamic banking would expand to a total value of $4 trillion dollars in another five years. The reason to this growth can also be attributed to the western banks taking interest in the Islamic banking instruments. Lloyd’s bank in the UK spread Islamic instruments to all of its two thousand branches in 2006 from five branches a year earlier. HSBC, Standard Chartered and Citigroup are some of the conventional western banks which have invested in Islamic banking.

Islamic bonds called Sukuk have been....

For more on this article, please click on the following link: Islamic Banking and Finance: Historical Perspective and Future Prospects: Economistan