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When an industry
expands at a rapid pace, glitches can be expected. This was recently
experienced in the sukuk market that is fast emerging as the most
significant form of financing around the world. Debt papers that adhere to
Shariah law have been growing at a frantic pace of 40% per annum and the
value of global sukuk issuances this year is anticipated to double the
amount of 2007 and exceed US$80 billion. At this rate, the global sukuk
market is on track to surpass the US$100bn mark in a few years.
But this industry is not
without its problems. One of the biggest obstructions in its development to
date is over its legitimacy with Shariah principles. This concern gained
notoriety at the end of last year when Sheikh Muhammad Taqi Usmani, chairman
of the Accounting and Auditing Organization for Islamic Financial
Institutions (AAOIFI), issued a statement to the media in which he said that
85% of all Gulf Islamic bonds do not fully comply with Islamic laws.
AAOIFI accounting standards are binding across six Arab countries as well as
the Dubai International Financial Centre. Regulators in other countries
including Malaysia, Australia and South Africa also use these standards as a
base for sukuk issued in their respective countries. Banks such as Goldman
Sachs Group Inc and UBS AG also use guidelines issued by AAOIFI to develop
their products. With such an extensive global influence, comments made by
the group?s chairman quickly led to scepticism and suspicions over the
authenticity of the global sukuk market, which was already battling
unfavourable credit conditions. According to Bloomberg, sales of global
sukuk had dropped to US$856m this year as compared to US$4.7bn in the first
quarter of 2007. This concern further fuelled speculation on the compliance
of other Islamic financial products.
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