Global issuance of sukuk fell 56 percent year-on-year to $14.9 billion in 2008, according to Standard & Poor's, as the market was caught up in the global liquidity freeze but also due to a debate on whether the majority of Islamic bonds, or sukuk, were sharia-compliant.
Prominent scholar Sheikh Muhammad Tariq Usmani said in late 2007 that most Islamic bonds were not compliant with sharia as their guarantee to pay out bondholders at maturity contradicts the principle of sharing risk and returns.
Peter Hodgins, a lawyer specialising in Islamic insurance at law firm Clyde & Co said Islamic insurance, or takaful, products could help reconcile the need for sukuk to comply with these requirements and investors' need to insure against risks.
"Takaful can be a solution to help out the sukuk market."
Takaful firms could provide insurance for sukuk investors that takes over notional annual payments to bondholders if they fall below an agreed amount, he said, adding that there were discussions in the industry on such a product.
In Islamic insurance, customers contribute to a pool of funds which is used to indemnify participants who suffer a loss, while in conventional insurance the insurer takes on the risk for a premium.
"As the sukuk market evolves, there could be room for such a product," said Nick Frei, chief executive of Bahrain-based Islamic insurer t'azur.
But he said pricing these products could be a challenge for takaful companies as the risk of sukuk was difficult to assess.-- Reuters