Sukuk: Islamic Bonds Are the safest Instrument of Investment

By Mohammed Khako

ccun.org, October 18, 2008
 

 
Financial markets are in full panic, Wall Street about to collapse, credit are frozen, money market and 401 funds are losing money. This is the most severe economic situation our nation's been in since World War II. Taxpayers and the Wall Street see the financial meltdown imminent in spite of the federal bailout package. The federal bailout package that President Bush has proposed as a quick cure of all problems will only aggravate the underlying cancer of interest-bearing debt. It is unlikely that the infusion of more money will reform the institutions built on layers of interest-bearing debt.
 
Over the last two decades Islamic Banking and finance has grown manifold in Muslim communities and countries. Islamic financing is attracting huge academic curiosity especially the “Sukuk” – the Islamic Bonds. At present they are safest instruments and have been shielded from the worst effects of the subprime mortgage meltdown. Presently, it is estimated that Islamic Banks and financial institution manage over US $ 200 billion of funds all over the world. Although small in terms of global assets, but the growth rate is impressive by any standard and growing.
 
The Islamic banks are least affected by the repercussions of the international financial crises instead the Islamic Banks have succeeded where others have failed mainly due to Shari'a Laws which prohibit Islamic Banks to take speculative risk and interest-rate options, which have resulted into financial destruction of many banks.
 
With the collapse of the Wall Street, Islamic finance has arrived on the main street of many countries, but the challenge would be to optimize financial investment according to Shari'a Laws.  For many years, Muslim economists have tried to develop systems based on social equity and justice, rather than laissez faire market operation with no Vail, however with the financial meltdown the time is right to do research in Islamic economics.
 
The Islamic finance is based on interpretations from the Holy Qur'an. Its two central tenets are: No interest can be earned on loans and social  and ethical responsibility according to Sha’ria should be adhered to while investing.  Muslims are encouraged to invest in “permissible” (Halal) funds that is to invest in corporations which incorporate environment sustainability criteria in their operation and will not invest in corporations dealing with forbidden items like usury, pork, alcohol, gambling, pornographic  movies, tobacco, and military hardware.
 
In Muslim societies, the taxes known as Zakat and Khums provide a vital mechanism for addressing social welfare issues. Zakat is on the income where all  Muslims are required to give away two and half percent of their income to the poor and needy. Zakat Al-fitr is religious tax/alms paid during the month of Ramadan to the poor and needy. Al-Rikaz is a third kind of tax on mining resources, like oil. Twenty-percent (Khums) of this resource should be spent on the poor and the needy.