INTERNATIONAL. Sales of Shariah-compliant debt, which financed Dubai’s Palm development, the world’s largest man-made island fell 50% in 2008 and prices dropped an average 1.51%, according to HSBC Holdings index data.

The Sukuk market, which has doubled each year since 2004 and grown to US$90 billion, is declining after a Bahrain-based group of Islamic scholars decreed in February that most bonds ran afoul of religious rules. Only one that complies with the edict has been issued, pushing up borrowing costs on projects including US$200 billion of real-estate developments in the United Arab Emirates capital.

“In times of distress, the first thing investors sell are the credits they don’t fully understand,” said James Milligan, Dubai-based head of Middle East fixed-income trading at HSBC, the biggest underwriter of sukuk bonds in the Gulf last year. “This has hit spreads hard in the region,” he said, referring to the relative level of the Islamic bonds’ yields.

The bonds satisfy Islam’s ban on interest by allowing investors to profit from the exchange of assets, rather than money. Sales of the debt fell to US$11 billion from January to August, from US$21 billion in the same period of 2007, according to data compiled by Bloomberg.

They peaked at US$38.6 billion last year, growing from virtually nothing six years earlier, the International Monetary Fund said. The decline in prices is worse than the 1.25% drop in US corporate bonds, HSBC data show.

Banks sell sukuk by using assets to generate income equivalent to interest they would pay on conventional debt. The money can’t be used to finance gambling, guns or alcohol.


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