Gulf Crisis Spurs Funds to Seek Asset Rights: Islamic Finance - BusinessWeek

The Dubai debt crisis is prompting investors in the $130 billion Islamic bond market to seek stronger rights of ownership of assets to protect against defaults, said a U.S.-based Shariah scholar.

Funds will favor asset-backed debt, in which the ownership of collateral is transferred after a default, said Sheikh Yusuf Talal DeLorenzo, the Washington-based chief Shariah officer at Shariah Capital Inc., a consulting company. Only 4 percent of the $32 billion of Islamic bonds Moody’s Investors Service rated in 2009 contain such provisions, the company said in an April report. The rest rely on the issuer agreeing to a sell assets financed by the bonds if they can’t make payments on time.

“Clearly, Islamic investors have felt that the present generation of sukuk has not met expectations for ownership, so changes are being demanded,” DeLorenzo said in a telephone interview on July 7. They “will require greater due diligence with regard to transfer of ownership,” he said.