IN JUNE Britain became the first non-Muslim country to issue sukuk, the Islamic equivalent of a bond (the word itself is the plural of sakk, which means contract or deed). The Hong Kong Monetary Authority made an issuance in September, and the governments of Luxembourg and South Africa will follow suit later this year. Nor has sukuk fever been limited to sovereigns: last month Goldman Sachs issued an Islamic bond, and before the end of the year, Bank of Tokyo-Mitsubishi and Société Générale, a French bank, are expected to do the same. All of these entities want in on the $2 trillion Islamic finance market. But what is Islamic finance, and why has it piqued the interest of non-Muslim countries and companies?
Broadly, Islamic financial products comply with the system of Muslim laws and norms known as sharia. Muslims consider pork, alcohol, gambling and pornography haram, for instance, so Islamic investment vehicles must steer clear of them. The Koran vehemently forbids usury. The debate over what, precisely, this includes is longstanding (and has led to the growth of a cottage industry of sharia-compliance advisors: religious scholars who rule on the acceptability of financial products and innovations and often charge sizable fees for doing so). But in practice it has led most Islamic financial products to eschew the payment or charging of interest, so sukuk and Islamic mortgages must be structured differently from traditional bonds and mortgages. Instead of receiving interest payments on lent money, as in a standard bond, a sukuk generally entitles its possessor to (nominal) part-ownership of an asset; he then receives income either from profits generated by that asset or from rental payments made by the issuer. In an Islamic mortgage, rather than lending a customer money to buy a house, the bank will buy the house itself. The customer can then either buy the house back from the bank at an agreed-upon, above-market value paid in instalments (this is called murabahah) or he can make monthly payments comprising a rental fee and a piece of the purchase price until he owns the home outright (ijara).