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Islamic bond market making a comeback

by Brad A. Greenberg

March 17, 2011 | 6:27 pm

Despite unrest in the Mideast, Muslim money is back. The New York Times reports:

It is too soon to say what effect the turmoil in Bahrain and elsewhere may have on the market, analysts said. But by mid-February, more than $16 billion worth had already been issued worldwide since the start of the year. High-profile issues from the Gulf region included a 3.5 billion dirham, or $953 million, sukuk from Aldar Properties in Abu Dhabi, issued on Feb. 28 and maturing in December 2013.

“What the market has done in 2009-2010 is grow back to the 2007 level of issuances,” said Paul-Henri Pruvost, an analyst covering Central Europe, the Middle East and Africa at S.&P. “Malaysia remains the real driver of the sukuk market, but compared to Southeast Asia, there are other large sukuk markets, such as Saudi Arabia, Qatar and the United Arab Emirates, that have strong economic needs and are still creditworthy.”

After two turbulent years, the market started making a strong comeback at the end of 2010. While Malaysia continues to dominate the sukuk market, accounting for 78 percent, or $39.8 billion, of total issuances in 2010, activity is picking up in the Gulf. The value of Islamic bonds issued in the Gulf alone jumped 61 percent in the past year, with issuances valuing $7 billion in 2009-2010, compared to $4.3 billion the previous year, according to research by the international commercial law firm Trowers & Hamlins.

What’s not clear from this story is what makes Muslim bonds Muslim. My recollection is that Islamic law—Sharia—prohibits the payment or acceptance of interest for loaning money. Islamic bonds and Islamic banking in general get around that, though I don’t really understand how.

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