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Sukuk market witnessing slump

Dubai, September 4, 2008

The sukuk market, which has doubled each year since 2004 and grown to $90 billion (Dh331 billion), is falling after a group of Islamic scholars decreed in February that most bonds ran afoul of religious rules, according to a report.

Only one that complies with the edict has been issued, pushing up borrowing costs on projects including $200 billion (Dh735.6 billion) of real-estate developments in the UAE, said the report in the Gulf News.

Sales of Sharia-compliant debt fell 50 per cent in 2008 and prices dropped an average 1.51 per cent, according to HSBC data.

Sales of the debt fell to $11 billion (Dh40.46 billion) from January to August, from $21 billion (Dh77.24 billion) in the same period of 2007, according to Bloomberg data.

They peaked at $38.6 billion (Dh142 billion) last year, growing from virtually nothing six years earlier, the International Monetary Fund said. The decline in prices is worse than the 1.25 per cent drop in US corporate bonds, HSBC data show. Banks sell sukuk by using assets to generate income equivalent to interest they would pay on conventional debt.

The Bahrain-based Accounting and Auditing Organisation for Islamic Financial Institutions ruled that bonds don't meet religious requirements if they haven't transferred ownership of collateral to holders. About 85 per cent of sukuk failed this test, it said.

The judgment meant the value of the underlying collateral may decline amid falling real-estate prices, rather than being paid at face value in a default as in a conventional asset-backed securitisation.

As demand for sukuks waned, yields rose to 2.94 percentage points over the Libor near a record and compared with 2.43 percentage points for an equivalent non-Islamic bond, Bloomberg data show. - TradeArabia News Service




Tags: Sharia-compliant | sukuk markat | Islamic scholars |

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