Complex and sophisticated financial instruments usually signal eventual trouble ahead and the world of Shariah-Compliant Finance is no exception.
Derivatives are tough to control, difficult to anticipate and hard to understand. Couple that with sukuk, instruments that are already convoluted to begin with, and you have a recipe for real disaster.
Nevertheless, that is what is happening in the Shariah-Compliant Bond market…
Interbank lending programmes that securitise sukuk are testing the Islamic finance industry’s ability to digest complex financial products.
Some firms are starting to combine sukuk, using portfolios of long-term issues to back short-term certificates. This lets them create liquidity programmes that address a major weakness of the Islamic finance industry: a persistent shortage of money market instruments needed by Islamic banks to manage their short-term funds.