http://timworstall.com/2008/03/22/another-little-problem-for-darling/

Another Little Problem for Darling

March 22nd, 2008 ·

Remember how Darling was going to change the law so he could issue Islamic bonds?

The chancellor is thought to be ready to prepare the ground for a landmark issue of a so-called Sukuk bond but will fall short of committing the government to immediate action.

A slight problem then.

New guidelines demand that investors become the legal owners of those assets rather than nominal holders, the Bahrain-based Accounting & Auditing Organization for Islamic Financial Institutions said on its Web site.

The rules from AAOIFI’s board of 18 religious advisers led by Chairman Sheikh Muhammad Taqi Usmani will make it harder for companies to issue Islamic debt at a time when borrowing is already shrinking because of the global credit crisis.

“This is a paradigm shift and will make life difficult for chief financial officers used to the existing structures,” Moody’s Investors Service analyst Khalid Howladar said in a phone interview from Dubai today.

Borrowers and their bankers until now created a fixed income for investors by promising to buy back the assets underlying sukuk at their face value on maturity, irrespective of whether the assets made or lost money, Moody’s Howladar said. These types of agreements are banned under the tougher rules because Shariah demands buyers and sellers share profits or losses from their transactions.

“Blemishes” have crept in that the industry must now “rid” itself of, AAOIFI’s board of scholars said last month. As much as 85 percent of sukuk sold to date may not comply with all the precepts of Shariah, the board said.

 

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