Wednesday, October 22, 2008

Coud the credit crisis spillover into Islamic finance? Sukuk issuance expected to exceed 2007 total

Despite delays in many planned sukuk, Kuwait Finance House expects sukuk issuance in 2008 to top the total from 2007 even though issuance through the first three quarters fell below 2006 and 2007 totals for the same period. The rationale is that since the economy is still growing rapidly in the areas in which many sukuk are originated, the GCC and Malaysia, and non-Muslims continue to invest in sukuk. This has been the case for much of the year, but there are indications that the real estate market in the GCC region is slowing from its torrid pace in 2007 and early 2008. Also, many of the non-Muslims investing in sukuk were hedge funds looking to have exposure to another asset class and many Western funds have been faced with redemption requests from their investors, damping their future demand for sukuk. KFH expects a total issuance of sukuk to be between $40 and $45 billion in 2008 compared with $32.65 billion in 2007.

An article in a newspaper in Guernsey proposes Islamic finance as an alternative to the problems created in the recent past by (conventional) financial system excesses. Overexposure to real estate investments, though, may pose a threat to the Islamic finance industry. Some Islamic finance practitioners see the Shari'ah-compliant securitization that is the heart of the sukuk market as a guard against the excesses that led to the credit crisis. I think that, not only will it not necessarily protect the Islamic finance industry, the use of some securitization products, particularly the opaque, highly structured ones could create a crisis within the Islamic finance industry, and one with a similar economic trigger: the fall in real estate values.

Also, despite growing rapidly over the past 8 years, Islamic finance has yet to make a significant impression on the global banking industry.

Without specifying who should lead, second finance minister of Malaysia Nor Mohamed Yakop wants a standardized documentation and policies for the Islamic finance industry. Currently, there are two main standards-setting bodies, AAOIFI in the GCC and the IFSB in Malaysia.

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