comment by Jerry Gordon

http://blog.americancongressfortruth.com/2008/06/27/radical-sheik-turani-scuppers-sukuk-bond-market-for-sharia-compliant-finance-too-greedy/

dubai-bourse-picture.jpgScupper is a nautical term for a drain. In ‘Britspeak’ it means to sink a vessel or proposition. Radical Sheik Muhammad Taqi Usmani, who heads the Bahrain-based Accounting and Auditing Organisation for Islamic Financial Institutions, basically ’scuppered’ the burgeoning sukuk or Shari’a compliant bond market. He thought the ‘boom’ in sukuk bonds was ‘too greed’, didn’t conform with Quranic standards, so he basically drained the market.

Note what this Financial Times report said:

    Last year, banks were hailing the rise of sukuk, or Islamic bond, as the next big thing.  

    Companies seeking expansion in the booming oil-flush region found a new form of finance that tapped the vogue for Shariah-compliance.

    This helped the region carve a niche by tapping the underserved Islamic market, while deepening capital markets in the Gulf, which fancies itself as the safe haven from the globe’s economic storm.

    The international banks that had been piling into the oil-rich region to grab their share of the petrodollar pie jumped on the bandwagon, building large structuring teams for these bonds, which pay profits rather than interest to coupon holders.

    Western institutions, too, were keen to plough money into these offerings. HSBC went a step further, building a Dubai-based fixed-income trading desk, partly to serve the nascent secondary sukuk market.

    But the credit crunch sucked the wind from its sails, sending spreads soaring and triggering a round of cancellations among issuers.

    The first quarter of 2008 saw an 80 per cent drop in the value of sukuk issued, according to data from regional business information provider Zawya.com.

    The lesson for bankers, perhaps, is that they can no longer blithely deconstruct a conventional product, re-engineer it in an Islamic format, and expect it to fly off the shelves without attracting the censure of the guardians of Islamic finance.

    Yet, Islamic finance being Islamic finance, people are already trying to revive the sukuk structures made unfashionable by Sheikh Usmani’s intervention. They are reworking the mudharaba and musharaka structures in a attempt to make these once-popular instruments meet the approval of clerics and customers alike.

 

So Turani said pass the ownership through the nominal pieces of paper. What came out of that was creation of a new whiz bang Shariah compliant financial structure. Note this from the Financial Times:

    To get round the sheikh’s concerns, issuers are turning to the ijara, or leasing, structure. Their number during the year to date has quadrupled compared with last year, while the value has risen sixfold.  

    Ijara structures are the easiest way to sidestep the controversy, as they use a leasing structure on an asset that pays a dividend to investors rather than interest.

    They have become the flavour of the month, easily marketable to investors who may fret over the Quranic credentials of some of the bonds that issuers have been selling over the past few years.

 

During a Victory Coalition conference call, today, I made the suggestion that to thwart Shariah compliant finance here in the US we need to go to the equivalent of the AAOF, the Financial Accounting Standards Board and present cogent arguments as to what Shariah compliant financing guidelines must have in the way of disclosures to be transparent. That would enable institutional investors to evaluate what the risk factors are of Shariah finance. Currently, Sheik Usmani can change the financial markets at the whim of a law ruling, totally without financial oversight roiling the financial marketplace

Gulf dispatch: Clerics’ doubts give sukuk market a hiccup

by Simeon Kerr, Financial Times, June 24, 2008

Last year, banks were hailing the rise of sukuk, or Islamic bond, as the next big thing.

Companies seeking expansion in the booming oil-flush region found a new form of finance that tapped the vogue for Shariah-compliance.

This helped the region carve a niche by tapping the underserved Islamic market, while deepening capital markets in the Gulf, which fancies itself as the safe haven from the globe’s economic storm.

The international banks that had been piling into the oil-rich region to grab their share of the petrodollar pie jumped on the bandwagon, building large structuring teams for these bonds, which pay profits rather than interest to coupon holders.

Western institutions, too, were keen to plough money into these offerings. HSBC went a step further, building a Dubai-based fixed-income trading desk, partly to serve the nascent secondary sukuk market.

But the credit crunch sucked the wind from its sails, sending spreads soaring and triggering a round of cancellations among issuers.

The first quarter of 2008 saw an 80 per cent drop in the value of sukuk issued, according to data from regional business information provider Zawya.com.

Many corporates seeking to raise finance simply turned away from the soaring spreads available from the conventional and Islamic debt markets and went back to old-fashioned bank lending.

The ample liquidity created by years of record oil prices has left cash-flush banks looking for projects to take on to their books.

But then the clerics stepped in, questioning the anything-goes attitude emerging in the sukuk market and other areas of Islamic finance.

Greed, the argument went, was undermining the spirit of this religiously-inspired financial system.

A senior cleric last year began questioning the Quranic credentials of most sukuk structures.

Sheikh Muhammad Taqi Usmani, who heads the Bahrain-based Accounting and Auditing Organisation for Islamic Financial Institutions, introduced new standards in March.

These force issuers to transfer ownership of the underlying asset of the sukuk to investors in the instrument, rather than allowing them to be mere nominal holders.

Bankers argue over the extent to which the new regulations – rather than the stark realities of the global credit crunch – impeded the market, but most agree they are still reverberating in some form.

To get round the sheikh’s concerns, issuers are turning to the ijara, or leasing, structure. Their number during the year to date has quadrupled compared with last year, while the value has risen sixfold. (Continue Reading this Article)

 

One Response to Radical Sheik Muhammad Taqi Usmani, who heads the Bahrain-based Accounting and Auditing Organisation for Islamic Financial Institutions, basically ’scuppered’ the burgeoning sukuk or Shari’a compliant bond market.

  1. Waheed Qaiser says:

    I fully agree and endorse Sh Taqi Usmani on the subject. Sheikh Usmani has contrubuted a lot through his scholarly guidance in the late revival of Islamic finance. Sh Taqi is also trying to ensure that while too engrossed in the quickest promotion of Islamic Banking and finance we do not lose the sight/values and main tenets of Islamic finance. Some short term approaches and our mindset on becoming complacent with certain compromises (which are only allowed on short term basis but our fellow bankers like to live with it)is of concern to all of us. It is therefore important that scholars like Sh Taqi keep reminding us on the right structures and principles of Islamic Finance. Separately I would also say that its moral responsibility of the scholars that they should dedicate certain amount of their time to educate all the segments of market players/stakeholders.

    Allah (God) knows best.
    regards

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