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Sukuk as a Way to Revitalize European Economies

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today 26 July 2014 GMT



It is no secret that many economies in Europe have passed through rocky finances in the last few years. Today, several countries, such as Greece and Ireland, are going through economic recovery after some disastrous periods for their economy. Could sukuk and other Islamic financial instruments play a part in the economic recovery of many struggling European economies? There are reasons to believe that they could. The fact is that sukuk have already been used to stimulate the finances of several struggling economies. For example, Pakistan raised $457 million Euro by using national assets such as motorways to issue sukuk. Companies that are owned by the Malaysian government have also raised millions of Euro using sukuk and, currently, Saudi Arabia is using sukuk to finance a large part of the construction of one of its most important airports.


Currently, the solution to many of these struggling economies’ problems have been loans from the European Union or from the International Monetary Fund with annual interest rates such as the 5.8% interest loan of $67.5 billion Euro that Ireland received to help its struggling economy. These types of loans can help countries stay out of debt for a while. However, diversification of resources is never a bad thing. As the loan funds start to dwindle, sukuk may become a promising income source. Beyond the actual sukuk, the issuing of these Islamic financial instruments could help these countries in the European Union strengthen their ties and build relationships with countries in the Middle East that are currently looking for places to invest their vast resources. Sukuk can help substitute the existing international lenders, adding some competition to the market and helping create more favorable conditions for countries in need of bailing out.


One of the main advantages of sukuk as a source of income for struggling economies is that it offers significant other advantages beyond the actual initial capital gain. The first reason why sukuk promises to be a way to aid these countries is that it is backed by the value of its underlying assets. This gives sukuk much needed stability, making its cost independent from the financial conditions in the issuing country, unlike loans that may have drastic interest rate changes due to changes in credit rating or inflation. Another important reason is that the issuance of sukuk is practically identical to funding of projects from the private sector. This means that the issuer can have more say in financial decisions due to the fact that the issuer can avoid many political conflicts and influences that often accompany financing from governments or government organizations.


As the United Kingdom prepared its recent sukuk issuance by strengthening its ties with Muslim countries and important Islamic finance centers, other countries followed suit. Currently, countries like Hong Kong and Ireland have made reforms to their tax framework that allow the support of sukuk, treating these financial instruments in a way similar to conventional bonds. Most importantly, tax agreements between countries in Islamic finance hot spots (such as North Africa and Southeast Asia) and Western countries have increased dramatically in the last decade.


Sukuk can become an important part of a country’s economic recovery, improving these countries’ fiscal position significantly through Shariah compliant financial instruments. Sukuk can also play an important role in helping market sectors such as the investment and securities industries grow. There is also the issue of International image. Issuing sukuk can greatly improve a country’s image on the international market, demonstrating that a country is committed to doing business with Muslim countries and giving these countries a leader’s advantage in this growing market.


Sukuk have been an attractive option for investors around the world and their growth has been quite impressive, especially in the last decade. In fact, the sukuk market was not hit as hard as other financial markets during the global economic woes of 2009. This global crisis actually coincided with an important sukuk issuance of $1.4 billion Euro by the United Arab Emirates, which boosted the market, increased investor confidence, and helped the global sukuk market as a whole. It also convinced other countries that the UAE would have no trouble paying its debts. Perhaps this type of positive effect could be sought by struggling economies in the West as well? It is definitely a possibility that countries should consider seriously.


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