posted by Christopher Holton

The Persian Gulf island nation of Bahrain has decided to cancel a billion dollar conventional bond deal and settle for a Shariah-compliant bond (sukuk) deal. The reason for the cancelation sheds light on the hidden risks involved in Shariah-compliant bonds.

Bahrain scrapped the conventional bonds because they would have been rated at junk (non-investment grade) status. To get around that, Bahrain has decided to go Shariah-compliant.

There are objective reasons why a nation’s bonds are rated as junk. Those reasons have to do with the fiscal health and financial worthiness of that nation. That fiscal health and financial worthiness does not change just because an issuing nation switches from conventional bonds to Shariah bonds.

What does that say about the safety and security of Shariah-compliant bonds when a nation switches to them to avoid being classified as “junk?”

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