The arrangement described in Esmerelda's post on "Islamic bonds" is a sham. This is a secured loan. The Government sells the asset; in other words it raises a loan. The Government guarantees to repurchase the asset, that is to redeem the loan. The rent, paid by the Government, and in turn by the taxpayer, is interest in all but name. There is no risk to the investor.

I object in principle - or should that be "principal", since this gets repaid? - to the idea of securing loans to wealthy Muslims on Government assets. Any acceptance of sharia, even if it is only the appearance of sharia, is wrong, and will be seen as a victory for Islam, which cares more about appearance than reality.

These vehicles are not Islamic. Even Muslims know this:

In the case of sukuk, the silly bonds marketed as "Islamic" by rent-seekers, there are numerous legal risks that are very poorly understood, including by the lawyers and bankers who structure the instruments. The problem in this case is self-inflicted: the lawyers want to structure the instruments, e.g. lease-backed bonds or sukuk al-ijara, in such a way as to assure "Shari`a scholars" that bond-holders have material ownership of the underlying assets and receive "rent" rather than "interest". At the same time, they want to assure markets and rating agencies that the instruments are indistinguishable from conventional bonds, where the only mateiral risk is credit risk of the issuer. The rating agencies read the legalese and conclude that the lawyers are right: the "Islamic" structure is merely a fiction, and there is only credit risk. They give the sukuk the same credit rating they would give any other unsecured bond issued by the same entity (see, e.g. S&P's analysis of Qatar's Global Sukuk, where the rating was based on the soundness of the Qatari economy, without any significance lent to the asset ostensibly being leased back by the issuing SPV).

Unless and until we have a high-visibilty case of bankruptcy, we will not know with any certainty who owns what in the maze of SPVs that lawyers and structured financiers love to use. Until then, many will continue to line their pockets with legal, structuring, and advisory fees, as they congratulate themselves on "innovative Islamic products." What a shame!

The proposal may well not go ahead, but it is wrong of the Government even to consider it. By doing so, the Government appears eager to yield territory to Islam, but because the bonds are not even properly Islamic, Muslims will not be satisfied. Neither one thing nor the other, yet somehow the worst of both worlds.