Furthermore, those who buy and sell conventional bonds are rarely interested in what is
actually being financed through the bond issue, which could include activities and industries
that are deemed haram such as the production or sale of alcohol. Companies that are
highly leveraged with bank debt may seek refinancing through issuing bonds, but such companies
are not regarded as suitable for Muslim investors.
The aim of bond traders usually is to make capital gains as fixed-interest bond prices rise
when variable market interest rates fall. Bond trading is therefore largely about exploiting
interest rate developments and trading in paper that is usually unrelated to the
value of any underlying asset. The major risk for holders of conventional bonds is of payments
default, but this risk is usually assessed solely on the basis of credit ratings, with
the ratings agency rather than the bond purchaser estimating the risk. Hence the bonds
are regarded as mere pieces of paper with third parties estimating the risk and the purchaser,
at best, only making a risk/return calculation without any reference to the business
being financed.
A number of Shari’a scholars, most notably Muhammad Taqi Usmani, have stressed that
one of the distinguishing features legitimising Islamic finance is that it must involve the
funding of trade in, or the production of, real assets.3 Merely funding the purchase of
financial securities would involve second order financing akin to lending for derivatives,
the subsequent gearing being speculative and increasing uncertainty, or gharar. Hence,
with murabaha, commodities are purchased on behalf of a client and resold to the client,
the temporary ownership of the commodity justifying the financier’s mark-up. Istisna’a
involves the financing of manufacturing capacity through pre-production payments, but
these relate to construction or equipment purchases where real capacity can be identified.Similarly, ijarah involves the leasing of real assets, with the use of the assets justifying the
payment of rental to the owner.
As Islamic finance is by nature participatory, purchasers of sukuk securities arguably have
the right to information on the purposes for which their monies are to be allocated. In
other words, the funding raised through Islamic bond issues should be hypothecated or
earmarked rather than used for general unspecified purposes, whether by a sovereign or
corporate issuer. This implies that identifiable assets should back Islamic bonds.
