From time to time we have reported on Islamic bonds, properly known as “sukuk.” These are convoluted instruments created by the Shariah finance community to get around prohibitions against interest. They are controversial even in Islamic circles, especially since major Shariah authority Mufti Taqi Usmani issued a fatwa declaring most of them “unislamic” over a year ago.

But beyond intramural squabbling in the Islamic world, there is another dirty, dark secret about sukuk: they have a high default rate. These instruments, which are customarily billed as being safe and conservative because of their Shariah-Compliance, are actually more risky than conventional bonds and the folks left holding the bag are not real happy…

This is more proof that just because someone, somewhere pastes the word “Shariah” on a financial product does not make it immune to the forces of the marketplace and the basic principles of economics…but that’s not something you will hear from the promoters of Shariah-Compliant Finance…


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