With Islamic investors continuing to bring large amounts of capital to the table, global markets are becoming more comfortable with culturally specific investment instruments.
The concept of Sukuk dates back over a thousand years. The Arabic word originally referred to financial contracts performed in conformity with Islamic law. However, in today’s world of modern financial instruments, Sukuks are often referred to as Islamic bonds.
The term is somewhat misleading, however. Sukuks specifically originated to address Islam’s prohibition on interest. According to Islamic Sharia law, charging interest is forbidden and profiting monetarily from lending to others is a serious sin. Such rules mean devout Muslims eschew financial transactions involving interest, a tricky prospect in a world where the bond market dwarfs other investment opportunities and interest rates set the pace of national economies.
However Sukuks allow investors guided by Islamic principles to put their money into fixed-income vehicles. While bonds generally represent a promise to repay a loan plus interest, different types of Sukuks are temporary partial ownership in something like an asset, project, or business. The ownership aspect helps investors conform to Islamic rules regarding interest while simultaneously replicating the cash flow of a conventional bond. Many Sukuk payments are even benchmarked to an interest rate, a practice that has drawn criticism from some Islamic scholars but has remained popular in the markets.
It is not just Muslim investors who are investing in Sukuks. While the investment instrument is understandably popular in majority Muslim countries like Malaysia and the United Arab Emirates, the United Kingdom and Luxembourg are also epicenters for Sukuks. In fact, the London Stock Exchange (LSE) has touted its position in the Sukuk market for the last several years, believing that it enhances the exchange’s reputation as a truly global player. Upon announcing the listing of a Bahraini government Sukuk in 1999, the LSE issued a press release saying that the listing, “highlight(ed) London’s standing as a key global venue for Islamic finance.” Today over 40 Sukuks listed on the exchange have raised over $23.7 million.
LSE’s efforts to place itself in a central position in the Sukuk market may prove to be prescient. According to Bloomberg, global sales of Sukuks have more than doubled this year, and major investors like the Malaysian and Indonesian national pension funds are desperately trying to find more investment-grade Sukuks where they can park their money.
The rise of Sukuks has also coincided with the globalization of Islamic finance. Strict Muslims have long avoided investing in equities associated with alcohol, gambling, pork products or other goods and services forbidden in Islam. In 1999 Dow Jones launched its Islamic Market Indexes, a savvy move that later spawned imitators. Islamic Indexes gained further attention during the 2008 financial crisis, when “Islamic” investing strategies held their value better than conventional investing schemes.
In the end, instruments like Sukuks represent much more than just a different way of investing. They represent the ongoing influence of individual cultural and religious values in what can sometimes seem like a monolithic, globalized system. Capitalism may have gone global, but there is still plenty of room for investments designed to fit the sensitivities of particular investors.