Shari'ah risk, the credit crunch, falls in sukuk issuance

Another article discussing the controversy surrounding the ruling by AAOIFI on the repurchase agreements contained in many sukuk also brings up another as yet unexperienced risk: default. Until now, the focus was on 'Shari'ah risk' of which the AAOIFI ruling was the most striking example. It essentially ruled that a common form of ijara sukuk containing the repurchase of the underlying asset at par which was approved by Shari'ah boards was no longer Shari'ah-compliant.

Different people within the Islamic finance industry have different views on whether the Islamic finance industry has been and can be moving towards standardization. I believe some degree of standardization is necessary, for no other reason than it would help address the shortage of Shari'ah scholars for the time being until there is a less dire shortage of scholars. Khalid Howladar, a senior credit officer at Moody's, believes that Shari'ah-compliance will not necessary become standardized, nor should it, since the most important factor for Shari'ah-compliance is not form, but the intention behind the transaction.

The credit crunch has had a significant impact on the Islamic finance industry and represents part of the cause of the fall in sukuk issuance. Other products, like Amiri Capital's "Shariah fund of hedge funds", are delayed. Amiri's launch is delayed because their prime broker, Lehman Brothers, is now bankrupt and mostly sold off to Barclay's and Nomura.

A Shari'ah scholar, Mohammad Akram Laldin, raised the prospect of new controversy about Shari'ah-compliance by criticizing products that merely mimic conventional finance products. Speaking to Reuters, he remarked, "People tend to, to a certain extent, dilute some of the principles or objectives of certain contracts in order to accommodate conventional features".

The Islamic Bank of Britain released its first half 2008 financial results showing a smaller loss than during the current period caused by the launch of several products.

The G8 countries continue to race towards being the first to issue a sovereign sukuk.

Dubai Group, a conglomerate of companies, wants the Dubai International Financial Centre (DIFC) to become a center of Islamic finance.

The Central Bank of Bahrain sukuk al-ijara was oversubscribed by 120%.