Islamic Bonds Gain Popularity Amid Global Financial Insecurity: Zetland
With the sub-prime crisis shaking the foundations of the global economy, the transparency of Islamic bonds are attracting investors worldwide.
Hong Kong (PRWEB) April 25, 2008 — The demand for Islamic financial products has surged in recent years due largely to their transparent nature, a report by Zetland Financial Group says.
Islamic securities — known as “sukuk,” the Arabic name for a financial certificate — have gained universal acceptance as a feasible alternative to conventional financial products, and have the potential to develop as one of the most significant mechanisms to raise finance, Zetland reports on its website.
Aside from the obvious attractiveness to Muslim investors, sukuk may also appeal to conventional investors looking for attractively priced instruments for regular income and capital gains.
While the sub-prime crisis has shown the vulnerability of tradition financial mechanisms, investors say Islamic finance products demand greater transparency and accountability from company management, and therefore make it more obvious when debt problems arise.
Under Islamic finance, the lender is also an investor and remains an active participant through the life of the transaction. This appeal has added to the growth in Islamic finance.
Global bond and loan offerings issued according to Islamic guidelines have jumped 64 percent to US$5.5 billion so far this year, data from Thomson Financial shows.
Islamic finance assets are growing at an annual pace of 20 percent and are set to hit US$2 trillion in 2010 from the current US$900 billion.
There are some similarities between sukuk and conventional bonds. It always has fixed term maturity, bears a coupon (profit), and is tradable on the normal yield price. However, sukuk is structured in such a way that the issuance is not an exchange of paper for money consideration with interest, as per conventional bonds.
Contrary to the default in the payment of conventional bonds and the investors losing all their wealth, the built-in safety aspect of sukuk being asset-backed reasonably assures the investors of their ability to retrieve a major part of their investment if things go wrong.
“At the core of the current sub-prime crisis is the securitization of sub-prime mortgages or debts, a concept that would generally not be acceptable from a shariah perspective,” said Arshad Ismail, Dubai-based head of sukuk at HSBC Amanah.
The report is one of many offered each month by Zetland Financial Group on its website. Zetland provides business and financial consultancy internationally and in the Asia region with an emphasis on operations in China, offering personal service and valuable advice with total confidentiality.