April 2009 Up to US$15 billion (Dh55.

09bn) of sukuk, or Islamic bonds, have been shelved

since the onset of the financial crisis because the specialised debt instruments became
indistinguishable from conventional bonds, an Islamic banking expert says. New issuance of
sukuk had completely dried up because Islamic banks were structuring them incorrectly from the
start, said Sohail Zubairi, the chief executive of the Dubai Islamic Bank Dubai Islamic Bank unit
Dar al-Sharia, which advises on how to structure Islamic financial products. "We lost at least
$10bn to $15bn since the onset of the crisis - I'm talking about the second half of 2008," Mr
Zubairi told Reuters. He added that companies seeking to issue sukuk had been approaching
banks with a proposed sum of money they wanted to raise and soliciting bids as if they were
seeking to issue conventional bonds. "This kind of structure is not Sharia-compliant. It's not right
to think that Sharia scholars are against issuing sukuk, but scholars are against issuing sukuk that
don't meet the controls set up to define the product as compliant with Islamic law," said Amin
Fateh Amer, a Sharia adviser with the Minhaj Shari'ah financial advisory board. Instead, sukuk
issues should involve the company targeting investors first with a business proposal and inviting
them to invest. The company should also say how much it expected to generate from the project
and the size of the potential return, payable regularly. "Sukuk collapsed because the starting
point was conventional. If the starting point would have been correct, I'm sure we would still
have been up and running," said Mr Zubairi. "The sukuk that were done, I'm sorry to say, were a
stepsister of conventional bonds. If sukuk were done in the correct manner, I think people today
will be running to sukuk." In February, controversy broke out in Bahrain when religious scholars
declared that the majority of regional fixed income securities were not in line with Sharia
principles, further damaging a struggling sukuk market. Sukuks had already suffered a $10bn
drop in sales last year before the onset of the financial crisis, which dried up international debt
markets in the third quarter. "About 85 per cent of what people are dealing with in the sukuk
market are not Sharia-compliant at all," said Mr Amer. "The point is that a product doesn't
become Sharia-compliant if you title it a sukuk - it has to meet stringent conditions." Demand for
investments and financial services that comply with Islamic law has been growing as Muslims
seek to invest their money in ways compatible with their beliefs. Still, the sukuk market is
unlikely to rebound until bonds recover, as the two are intertwined, according to Mr Zubairi.
"There is definitely a demand and a need for sukuk, though in general the fate of the sukuk
market is tied to the conventional bond market," said Mr Amer. - with agencies

By Sara Hamdan