Clerics Shake Up Islamic Finance

Concern bonds violate Sharia causes crisis despite stable market

By Kevin Spak, Newser Staff

Posted Sep 24, 2008 9:49 AM CDT

(Newser) – Of the challenges facing Western financial markets, fear of divine intervention isn’t one. The Middle East’s booming debt market is considered one of the most stable in the world, but investors there are getting a taste of “religious interpretation risk,” Portfolio reports. Islamic scholars are declaring that some 85% of sukuks, or Islamic bonds, violate Koran rules against accepting interest.

To comply with the rule that all profit and risk must be shared, Islamic bondholders derive payment from revenue from real assets. But one powerful scholar says such structures are just “ploys that sound minds reject, and bring laughter to our enemies.” Particularly at issue are clauses ensuring lenders get their principle back; should a sukuk default, religious authorities could try to void those clauses.

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Coins of Qatar and the UAE along with passports and other documents. (Shutterstock)

Dinar and dollars are seen in this file photo. (Shutterstock)

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The main fear that investors have is what will happen in practice if some sukuk goes bad. Judges will want to know what sukuk really are, and ... Sharia scholars will no doubt have some input. - Professor Ibrahim Warde,
on Islamic bonds

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Clerics Shake Up Islamic Finance