The fast-growing Islamic bond industry has been seized by a fit of religious doubt.

The Islamic credentials of the bonds, called sukuk, have faced growing questioning, forcing financial engineers back to the drawing board in search of structures more compliant with Islam.

Criticism of sukuk as “unIslamic” was first voiced late last year by Sheikh Muhammad Taqi Usmani, a religious scholar who heads the Bahrain-based Accounting and Auditing Organisation for Islamic Financial Institutions (AAIOFI).

Bankers say the views reflected a growing unease among religious scholars, whose support for sukuk has fuelled growth in the industry.

“It [the criticism] has had a huge impact,” said Hussein Hassan, head of Islamic finance at Deutsche Bank, on the sidelines of a Euromoney conference in London. “A lot of structuring of sukuk was put on hold until the issue was clarified.”

After consultations with bankers, the 18-member Sharia, or Islamic law, board of the AAIOFI will give its say on the sukuk debate next week, according to Mohamad Nedal al-Chaar, secretary-general of the organisation.

Total sukuk issuance surged 73 per cent last year to more than $47bn, according to the Islamic Finance Information Service, a data provider. Sukuk issuance has reached $1.3bn so far this year, according to IFIS. But some bankers say sukuk will now require more stringent structures to appeal to buyers, regardless of the AAIOFI ruling.

The debate over the purity of sukuk underlines the wider problem of a lack of standardisation in Islamic finance. Each financial institution relies on its own Sharia board to sign off on products. Different scholars can disagree on what is “Islamic”, even within one country.

Sukuk come in different structures but the most popular form during the past two years involves a repurchase undertaking where the issuer promises to pay back the face value of the bond when it matures or in the event of a default. This structure, however, looks to some like a guaranteed return, which goes against the spirit of Islamic finance where interest is banned and buyers should share risk and profit.

Until now, most Sharia scholars have approved the controversial structure as they sought to expand the market.

“They’re saying we’ve given leeway to develop the market and now we need to be stricter in our approval,” Mr Hassan said.

Source: FT.com

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