I attended my Islamic Capital Market class recently and my learned Professor shared with us an article in the Wall Street Journal on the first sukuk (Islamic bond) default and no one has a clue how they’re going to shake out - which might actually be a feature rather than a bug.
Bondholders often have a large amount of complacency derived from the fact that an enormous amount of equity needs to be wiped out before they take any hit at all. And that complacency does the system no favours in the long term. If capital structures get muddied a little, and debt takes on more equity-like uncertainty — as seems to be the case in the sukuk market — then maybe investors will be more assiduous about examining underlying risks, rather than relying on capital structures to protect them.
This is not the only controversy in sukuk issue – if we still remember from my earlier posting, a renowned scholar Muhammad Taqi Usmani announced in 2007 that the most popular type of sukuk structures, responsible for up to 85% of issues, were unlawful according to Islam. The main problem with these type of sukuk is that they offered partial or total guarantees of repayments or of annual distributions, which ran counter to the Islamic principle that parties to a financial transaction must share in the risks and rewards attached to it, which also see, the Bahrain-based Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) formally ruled such structures were not Shariah-compliant in 2008.
No comments:
Post a Comment