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Dr Lallmahamood
Its newest “social and ethical” banking product: the “Sukuk”--Islamic bonds--proposes an alternative for Government of issuing new debt on potentially cheaper and less risky terms.
“The scope for Government issuing the Sukuk, known as Sovereign Sukuk, is clearly enormous. It provides the State with the possibility of issuing new debt on potentially cheaper and less risky terms than those applying to conventional bonds,” says Dr Muniruddeen Lallmahamood, Certified Sharia Advisor and Auditor.
“Sukuk is a funding alternative that can enable Government and private entrepreneurs to raise cash when tax collection is no longer an option or that traditional investors get scarce,” he says.
Sukuk, it seems, has emerged as the latest investment trend around the world. According to Mckinsey's data, Sukuk issuances were estimated to have generated some US $ 60 billion at October 2008 from a mere US$0.3 billion in 2000.
Dr Lallmahamood says numerous advantages will emerge from the issue of such Islamic bonds in Mauritius. He says it will allow a diversifying of our traditional investment base attracting investors from the gulf and the Middle East and at the same time offering an alternative investment instrument both for domestic and international investors seeking sharia compliant instruments and social investments.
“It is a fact that those who buy and sell conventional bonds are rarely interested in what is actually being financed through the bond issue. With the Sukuk, the buyer can monitor the purpose for which he buys or sells the bonds, and may refrain from doing so if the bond issue involves the production or sale of alcohol, pornography or tobacco, all against
the Sharia,” he says.
He adds: “It will also allow the widening of the sharia based financial products in Mauritius, while diversifying financing sources in order to increase the flexibility of the government's long term funding strategy, allowing the state to be less dependent on institutions such as the International Monetary Fund, the World Bank or the African Development Bank.”
There presently exist 14 classes of Sukuk according to the Accounting and Auditing for Organizations of Islamic Finance Institutions (AAOIFI). Sukuk could be used for various economic and trading purposes, including raising funds for land cultivation or even irrigation of land. However the most common is the Sukuk ljara concerned with real estate assets.
Issuing Sukuk outside an islamic jurisdiction will raise a variety of legal and practical issues, says Dr Lallmahamood. “A review of the current regulatory framework will be essential in order to make the financial legislation sharia compliant. We need to review laws regarding bankcrupcy, tax, trust, corporations, securities regulations, real property.
Such amendments will allow Mauritius to leverage on its competitive financial sectors. Another hurdle for the moment is the absence of a supervisory sharia board. Moreover, projects that are typically local currency generators for utilities, toll roads and dams works have difficulties in attracting long term foreign capital because of the inherent currency risk of depreciation. However a solution to this problem could be to issue Sukuk in stable currencies such as the dollar or the euro,” Dr Lallmahamood says.
At a time where builders, developers and manufacturers as well as Government are looking for investments, Dr Lallmahamood says the Sukuk could be an interesting and useful alternative to classic bonds and investment sources.
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