II :: Sector Watch - Islamic bond development part of 'phenomenal growth'

The rapid growth and development of Islamic finance is seeing a variety of products released in accordance with Shariah law.

With Islamic mortgages and savings accounts booming, the latest development to hit the market are sukuk.

Sukuk is the Arabic term for a financial certificate, although it can also be viewed as the Islamic equivalent of a bond.

A traditional bond is debt security, in which the issuer owes the holder a debt and is obliged to repay the interest and principle later on.
A bond is a type of savings account where a high rate of interest is paid but cash is tied up in the account for a set period of time and they tend to be issued for a fixed term longer than a decade.

Sukuk securities comply with Islamic law and therefore are not interest bearing, because Islamic law prohibits the charging or paying of interest.
The essence of sukuk is securitisation and transforming the future cashflow of an asset into the present.

At the end of last year, the sukuk market was valued at over $50 billion and it is expected to continue to rise dramatically this year, as consumer awareness of Islamic finance increases.

Junaid Bhatti, from the Islamic Bank of Britain, said that the response to the launch of Shariah-compliant financial products has been "phenomenal".

He revealed that money deposited in Islamic accounts went towards low risk investments and suggested the profit made from those investments was shared with customers at a pre-agreed ratio.

"In terms of products coming out, we are still the pioneers. We still have several products that the other providers don't have available. We were the first to introduce Islamic savings accounts in the UK and we're still the only provider of Islamic banking that offers that.

"We were also the first to introduce unsecured personal financing and that's still something that none of our competitors can offer."
And Mr Bhatti revealed that the response to Shariah-compliant products had been massive, suggesting around 5,000 new customers were joining in every quarter.

The growth in uptake of sukuk will also be fuelled by the news that the government has adapted regulations in order to authorise Shariah-compliant finance and not dampen its growth potential.

The Financial Services Authority (FSA) revealed that Islamic mortgages were authorised at the start of April.

Robin Gordon-Walker from the FSA revealed that they were looking at ways to authorise a variety of financial products in order to comply with Shariah law, including insurance products.

He also suggested that the FSA was working with Islamic experts in order to maintain growth and provide products for the Islamic community.
"We do consult with Islamic scholars when we are planning our regulation to ensure that what we are doing will allow them to act Shariah-compliant but also meet our requirements and follow our rules on selling and advice, that's no different. It's more about the actual structure of the product," he commented.

Emile Abu-Shakra from Lloyds TSB suggested that although sukuk are a relatively new product, he anticipated a similar success to the Islamic mortgage.

"If it's anything like the mortgage market, it compares very, very well. The point will always be that the market is very competitive and there are many, many offers," he commented.

"The mortgage market's one of them and the bond market will be equally as competitive - there will be hundreds and hundreds of non Shariah-compliant offers, and maybe one or two or three Shariah-compliant offers.

"It's always going to be the case that there are cheaper offers available, just because there are so many more non Shariah-compliant, but there will also be more expensive products. So generally, I expect it will be very competitive, but I don't know for sure."

The UK Treasury recently suggested it is conducting a study to see how the British government could issue sukuk in the sterling market.
Treasury minister Ed Balls said: "I believe there are great potential advantages for the UK government issuing Shariah-compliant government debt.

"The feasibility study will also be assessing the opportunity for issuing such instruments, taking into account the government's debt management objectives."

Measures in Gordon Brown's recent Budget enable sukuk to be issued, held and traded in the same way as traditional bonds.

"The measures this government has taken make it possible for issuers to seriously consider the merits of issuing Islamic finance instruments," he added.financial products, it is a fair estimation.