Islamic Finance - Sukuk?

What is Islamic Finance? If Sharia prohibits lending of money based on interest, how will bankers survive?

This paradox disappears when you’re sitting on a pile of petrodollars. When you have financial assets of more than $500 million, expanding at 15-20%; when global banks vie with each other for your funds, you’d better take a closer look at Islamic Finance!

The religious view is that receiving high rates of interest on money lent to a poor debtor violated justice. Underlying this precept is the view that money was something that symbolized economic value and was significant only as a means of preserving that value. Therefore true value was preserved only if it was invested in real assets. So, under Islamic finance, transaction in real assets is based on sharing of profit and loss between the lenders and the borrowers.

This may sound Utopian fact is that there is a growing market for innovative instruments offered by Islamic finance. Some of them are –


Murabaha: Similar to installment sales contract

Istisna: A variation of Murabaha applied to housing loans

Ijara: Corresponds to a lease agreement

Musharaka: Similar to investment trust;

Takaful: A kind of casualty insurance covering capital transactions in banking, securities and insurance

Sukuk: ‘Islamic bonds’ mobilizing funds from a large number of investors


Thanks to these innovations, Malaysia now has the largest Islamic financial market in the world, surpassing Bahrain.

In the 1980s repatriation of petrodollars through the London market became a catalyst for the formation of the Eurodollar market. In 2004, FSA-UK starting pushing aggressively for repeat performance for a piece of the IF cake. Japan too is jumping into the fray using JBIC.

Restriction imposed after 9/11 have diverted money flows from USA to illiquid infra projects in the Persian Gulf through IF. Now the emerging market in India is attracting the attention of Islamic petrodollars...

I guess it all goes to prove yet again that IF there is a will, there is a way!

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Ref.: T. Maeda’s note – “A Strategic Approach to Islamic Finance”; JJ 10/07]

NOTE - 10th September 2008
According to the Economist (04 Sep. 2008), Islamic assets under management now stands at $700 billion. S&P thinks this could go up to $4 trillion. However, the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) has objected to Sukuk in its present form as it contravened Sharia principles. This could lead to problems...