"Shariah requires that investors profit only from transactions based on the exchange of assets, not money alone, so interest is banned. Bankers sell Islamic bonds, or sukuk, by using property and other assets to generate income equivalent to interest they would pay on conventional debt. The money cannot be used to finance gambling, guns or alcohol."
^^^^ CB: Sounds like populist snake oil, but not the American kind. ^^^^^ Apparently, this side of business is growing worldwide, what with high oil prices. I don't know where exactly the money is getting invested, but I suspect much of that leaves predominantly Muslim nations and gets sucked into financial centers of the North, or perhaps Dubai and places like that. <http://www.iht.com/articles/2007/05/01/news/bxatm.php> Banks seek out Islamic scholars for new bonds offerings By Will McSheehy and Shanthy Nambiar Bloomberg News Wednesday, May 2, 2007 DUBAI: Sheikh Nizam Yaquby is the gatekeeper to the $1 trillion market for managing Muslim wealth. Yaquby, who lives in Bahrain, said he was on the advisory boards of 40 finance companies, and told Citigroup, American International Group and HSBC Holdings which insurance policies, accounts and bonds they could sell to devout Muslims. Banks cannot find enough scholars steeped in the teachings of Muhammad to accommodate the demand for bonds that conform to Shariah law. Without men like Yaquby to bless the borrowings, none of the $70 billion of Islamic debt outstanding can be traded and companies would have been unable to sell any of the estimated $17 billion in new offerings last year. "The credibility of institutions comes from the stature of the Shariah boards they have," said Afaq Khan, head of Islamic banking at Standard Chartered in Dubai, a major underwriter of Islamic bonds. "Transactions can get shot down at the structuring stage if scholars don't allow them." Shariah requires that investors profit only from transactions based on the exchange of assets, not money alone, so interest is banned. Bankers sell Islamic bonds, or sukuk, by using property and other assets to generate income equivalent to interest they would pay on conventional debt. The money cannot be used to finance gambling, guns or alcohol. The world's top five banks by assets - UBS in Zurich, HSBC and Barclays in London, BNP Paribas in Paris and Citigroup in New York - all have Islamic units. CIMB Group in Kuala Lumpur is the biggest underwriter of sukuk this year, followed by Standard Chartered in London, Barclays and Citigroup, Bloomberg data show. Sales of sukuk grew nine times faster than international corporate bonds last year and twice as fast as the U.S. market for debt with ratings below investment grade, according to Bloomberg data. The assets managed under Islamic rules will almost triple by 2015 to $2.8 trillion, according to the Islamic Financial Services Board, an association of central banks based in Kuala Lumpur. Getting approval from scholars takes a minimum of two weeks, says Hissam Kamal, head of Islamic finance for HSBC Saudi Arabia. "For an established issuer that could tap the conventional bond market in just a few days, there's a significant extra lead time for Shariah compliance," Kamal said. "You can't complete documentation and a fatwa in a week. It will be two or three weeks, at best." The Shariah finance industry, born in the 1970s after a 12-fold jump in oil prices, is expanding with crude prices near record highs enriching Islamic nations. The billionaire Maan al-Sanea, one of the largest shareholders in HSBC, plans to use property in eastern Saudi Arabia to raise as much as $5 billion for his Saad Trading, Contracting & Financial Services. He will create a trust company called Golden Belt 1 Sukuk that will lease the land to Saad Trading. Golden Belt will pass on the rent paid by Saad Trading to bondholders, avoiding interest. "The land's value or what's built on it isn't hugely relevant to the sukuk," said Philipp Lotter, a corporate finance analyst at Moody's Investors Service in Dubai. "Its purpose is to provide an asset that Saad Trading can pay rent on." The British Treasury minister, Ed Balls, last month said the government might sell Islamic bonds, following the German state of Saxony-Anhalt and East Cameron Gas, a Texas company. The Japan Bank for International Cooperation plans to sell as much as $300 million of sukuk in Malaysia. Tokyo-based Aeon Credit Service in January became the first Japanese company to sell Islamic bonds. Nakheel PJSC, the Dubai developer building islands in the shape of palm trees for luxury homes in the Gulf, raised $3.52 billion in November in the biggest sukuk sale ever. Shanthy Nambiar reported from Bangkok. -- Yoshie _
