KUALA LUMPUR, Sept 30 – This year is highly likely to witness the first-ever decline in overall issuance of Islamic bonds, known as Sukuk bonds, since reliable statistics began to be compiled, with the annual total expected to fall by as much as 50 per cent from the previous year. The expected sharp decline reflects the spread worldwide of concerns about financial system instability, observers said.

Islamic bond issuance in the first eight months totalled US$12.5 billion, about one-quarter of the total of all of 2007. Concerns are deepening about the severity of the spillover from the US financial system crisis into wider markets worldwide, casting a shadow on the Islamic financial market, which had been growing rapidly in recent years, analysts noted.

Sukuk bonds play a prominent role as an Islamic financial instrument designed and managed in compliance with Shariah, or Islamic traditional law, which forbids the payment or receipt of interest. Accordingly, investors do not receive interest on the bonds, but rather share returns earned by bond issuers through their investment activities, commodity transactions and other similar deals using funds raised by floating the bonds.

The bonds are typically issued to finance infrastructure development projects in Middle Eastern countries or Malaysia. A large portion of Mideast petrodollars would seem to have been invested in Islamic bonds. Islamic law prohibits bond issuers from investing the funds raised in unacceptable businesses, such as those involving liquor, pork or gambling.

A survey by the International Islamic Financial Market, established by Islamic nations in 2002, found that about US$46.6 billion worth of Islamic bonds were issued in 2007, up 70 per cent from the previous year, on the back of swelling oil money powered by soaring crude oil prices.

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