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Banker Middle East – The business of banking – Sukuk: Hot Topic in Islamic Finance & Banking May 28, 2007

Posted by islamicfinanceaffairs in Uncategorized.
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Banker Middle East – The business of banking

Sukuk is the hot topic in Islamic finance, and we will soon see the industry reach a value of some tens of billions, as Michael Saleh Gassner from IslamicFinance.de writes…


Islamic finance has for some time missed investment opportunities for
Muslims that offer a predictable return with low risk. The majority of
investment opportunities are based either on stock markets with high
volatility or on real estate transactions. The investment galaxy for
the Islamic investor is lacking the variety of instruments to create an
efficient portfolio in line with portfolio theory and financial
planning. Sukuk certificates meet the pressing need for a medium term
investment and reached, in 2004, a market volume of nearly US $7
billion. This volume will multiply in coming years to tens of billions
of dollars annual volume. Already a number of world-class borrowers
have used the new Islamic Sukuk market: Germany; the IMF Group; and
Sovereign states like Qatar and Malaysia.

Sukuk are securitised assets and therefore
belong to the category of Asset Backed Securities. Unlike conventional
ABS structures, Sukuk need to have an underlying tangible asset
transaction either in ownership or in a master lease. The
securitisation of pure cash flow streams from credit portfolios as
undertaken in the mortgage market, for instance, cannot be structured
in the same way. A properly made Sukuk limits the debt to the value of
the underlying assets. A solid investment policy of the borrower
results and the vicious circle of raising debts and running after them
in hard times is handled in an ethical and socially more convenient
way. This allows the borrowers time sort the situation out. This is
important for modern states as many of them borrow money to be repaid
by future generations without regard to whether any assets cover the
debt or not.

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