Saturday, November 21, 2009

Criticism of tawarruq, GE Capital sukuk

According to the Secretary General of the OIC Fiqh Academy, Abdul Salam Al-Abadi, some GCC-based banks have reduced their use of organized tawarruq following the OIC Fiqh Academy's criticism of the practice as not Shari'ah-compliant. None of the banks were identifies, but if it is the case that the OIC Fiqh Academy ruling had an effect, it increases the uncertainty in Islamic finance about which products are Shari'ah-compliant and also the Shari'ah risk associated with changing and differing views over time about whether a given product will remain accepted as Shari'ah-compliant. The Secretary General of the General Council for Islamic Banks and Financial Institutions (CIBAFI), Ezzadine Khoja, also criticized tawarruq. His criticism was that "The goods are just virtual, there is no real movement of the goods [...] All things are done by the bank, the bank at the end gives money and takes more. There is no effect on the economy".

The GE Capital sukuk for $500 million was priced at 175 basis points over Treasuries, which compares to 155 basis points over Treasuries for recently issued conventional debt. The difference of 20 basis points can be viewed as a 'sukuk premium'. It is unclear what this premium reflects, but it could be due to the relative lack of clarity about how sukuk function either in restructuring or default. The sukuk issuance comes 4 months after GE Capital ended its issuance of debt with a government backstop that began during the credit crisis. While GE Capital was a part of the Temporary Liquidity Guarantee Program, it issued $51 billion in long-term debt and $17 billion in commercial paper.

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