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Weekly word: sukuk

December 22, 2010

Sukuk are commonly understood as Islamic bonds.  They have the same effect in theory—a steady stream of income for after an upfront investment—but they are craftily structured to give the appearance of compliance with Islamic law.  Here’s a definition from A Muslim’s Guide to Investing & Personal Finance:

Sukuk are asset-backed securities designed to provide a relatively fixed stream of investment income without violating the Islamic prohibition on interest. Instead of interest payments, sukuk investors receive a pass-through of income generated by the underlying assets. Sukuk are a Shariah-compliant tool for raising capital and may be structured around a variety of Islamic contracts.*

OK.  Sounds ethical right?  No—it sounds absurd.  There is nothing wrong with lending your money to another person or entity and receiving a dividend or interest payment for having lent it to them.  The basic reality is that money has value and time has value.  You should be allowed to get some compensation beyond the principal if you part with your money for a period of time for somebody else to use.  If I lend Sears $1,000 by buying a corporate bond from them, what on earth is wrong with Sears paying me a dividend until the bond matures?

But Islamic law doesn’t allow Muslims to accept basic realities about the value of money.  It pretends money and time have no value and that interest is as unwelcome as pond scum or asthma, which are riba’s Arabic synonyms.

Alyssa Lappen has addressed several other dangers endemic to sukuk in this article (h/t SFW).  Lappen notes that because of the high yields promised by sukuk salesmen, sukuk  would normally be classified in the U.S. financial system as junk bonds.  Moreover, asset-backed securities, not just paper securities, are highly prone to risk.  The underlying assets can be easily devalued.  Look at the housing meltdown which was also backed by assets—peoples’ homes. 

Islamic taxes like zakat and Islamic financial products like sukuk are part of an economic model that has resulted in glittering opulence for some Muslims and abject misery for most.  We import their economic philosophies at our own peril.

Outstanding coverage of sukuk is regularly available at Shariah Finance Watch.

Morris, Virginia, A Muslim’s Guide to Investing & Personal Finance (New York: Lightbulb Press, 2001).

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