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Desert fortunes

Thursday 10 June 2010 - by Georgie Rawkins

In the first of a series of pieces on Islamic finance, Georgie Rawkins looks at the performance of sukuks during the crisis and what reforms the market needs

Islamic finance was seen by some investors as a haven untouched by the casino-like investment banks of the West amidst the chaos of 2007 but it still faced problems of its own.

Focusing on the conservative constraints of Sharia law, Islamic finance has an emphasis on risk-sharing, ethical investing, and prohibition of any form of financial gambling.

This methodology was outlined by Central Bank of Bahrain executive director of financial institutions supervision Abdul Rahman Al Baker, who said: “Islamic financial products represent a class of investment, which may appeal to those looking for socially responsible or ethical investments, as these products comply with strict Sharia rules that have religious as well as ethical underpinnings.”

The reassurance derived from this approach is demonstrated by the performance of the sukuk market (Islamic equivalent of bonds), which, at its peak in 2007, had €29bn ($35bn) worth of sukuk financing issued world-wide.

Though levels have since dropped by about 40 per cent, approximately €17bn ($20bn) is due to come onto the global markets this year.


Trust is explicit in Islamic finance, declared by both the institution and the investor, because, in order to comply with Sharia law, no party can profit from interest whether lending or accepting money. Therefore, the role played by the institution becomes that of an impartial facilitator of financial transactions and each party involved shares equal risk.

Unfortunately, the global economic problems have been too great to leave the shareholders and customers of Islamic finance untouched, and once issuers began defaulting, the egalitarian risk-sharing notion decreed by Sharia law became far less attractive. Oil prices fell by 54 per cent in 2008, the largest fall since 1987, and, combined with a real-estate slump in the Middle East, (fuelled by a housing boom that created thousands of dwellings just as demand began to evaporate) investors fled the Islamic debt market.


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