85% of sukuks (Islamic Bonds) are non-compliant with Sharia!!!

Remember what i said about Islamic Scholars being in short supply as well as not being consistent or fully knowledgeable? Well, this is the proof that they are actually selling stuff that's not really fully Islamic althought this is very debatable. The problem is that there is not one globally agreed form of sharia, and interpretations differ.

So this is the problem, this Association says that the 85% of the Islamic Sukuk bonds are unislamic. But then, when these bonds were originally issued, they did come with a rock solid fatwa from a rock solid group of Islamic Sheikh's who guaranteed that they were Islamically correct. Now who is right?

Well, I would strongly suggest that the BIS get involved and start establishing standards otherwise we will have severe financial dislocation across large swathes of the global market and that's the last thing which we need.

Almost all the Islamic bonds sold by companies in the Gulf region do not entirely conform to the religion's law, according to an Islamic finance industry body, casting doubt over the legitimacy of a multi-billion dollar market that is growing rapidly.

Islamic bonds, or sukuks, are structured in a similar way to conventional bonds, but offer coupon profits instead of coupon interest, as interest is banned under Islamic law. Nearly $40bn (€27.3bn) of these bonds have been issued this year, from virtually nothing in 2001.

However, the Accounting and Auditing Organisation for Islamic Financial Institutions has said some 85% of so-called sukuk bonds do not comply with Islamic law, principally because they have been structured with a repurchase agreement.

This promise by the company to repay the bond’s face value at maturity, or in the event of default, actually violates the Sharia principle of risk, according to Sheikh Muhammad Taqi Usmani, chairman of AAOIFI’s board of scholars. The AAOIFI is a non-profit organisation responsible for developing accounting, auditing, ethics, governance, and sharia standards for the international Islamic banking and finance industry.

Islam bans lending on interest as usury and returns derived from underlying physical assets are paid to bondholders instead. These physical assets may be financed through a profit-sharing venture, in which proceeds are distributed to investors.

Usmani told Reuters at an Islamic banking conference in Bahrain this week: “You must face the actual consequences of your investment. For current sukuk, risk is not shared and reward is not shared according to the actual venture proceeds. About 85% of sukuks are structured in this way.”

He added that scholars on AAOIFI’s board are set to discuss the structure of bonds backed by repurchase agreements in January, when they may take a decision on whether to tighten the rules surrounding the structure of the transactions.

Bankers said any decision to by AAOIFI to explicitly prohibit repurchase agreements in the structure of sukuks could seriously impair the market, which also spans the south-east Asian region.

Without a repurchase agreement at a set price, a sukuk bond’s return would depend upon the performance of the underlying asset, which may deter issuers and investors seeking stable and predictable returns, bankers said.

Harris Irfan, a director of Deutsche Bank in Dubai, told Reuters: “The sukuk would become more of a profit sharing instrument…from a debt-like instrument to equity, and that’s a fundamental change of mindset for investors and issuers.”

Separately, Standard and Poor's Index Services, a unit of the rating agency, and Tokyo Stock Exchange have launched a new Japanese equity index, which gains exposure to sharia compliant leading companies in the Japanese market.

The offshoot of the S&P and Topix 150 sharia index, which will include 79 Japan-traded stocks selected from the original index, will start publishing from December 3 this year.

Sharia indexes exclude businesses that offer products and services which are considered unacceptable or non-compliant according to sharia law, such as advertising and media, alcohol, financials, gambling, pork, pornography and tobacco.

These indexes are monitored on a daily basis to ensure that the indexes maintain strict shariah compliance.

All this to be taken with a grain of piquant salt!!!