The Islamic finance industry, particularly the Sukuk market, faced unprecedented challenges in 2008.

Namely,the ongoing global credit crisis, rising cost of borrowing,lack of investor commitment to capital market securities as well as debates over the Shari'ah compliance of some Sukuk structures, says Moody's Investors Service in a new Special Comment published today.

'By the end of 2008, global Sukuk issuance had declined by more than 50%,' says Faisal Hijazi, Moody's Business Development Manager for Islamic Finance and author of the report.

'Globally, credit markets underwent a significant decline in debt market issuance, mainly driven by the lack of global economic visibility, pricing and a lack of committed investors. The Gulf Cooperaton Council (GCC) and Malaysia were hardest hit, with Sukuk issuance declining by 55% and 59%, respectively.'

he added.

The report, entitled 'Global Sukuk Issuance: 2008 Slowdown Mainly Due to Credit Crisis, But Some Impact from Shari'ah Compliance Issues', says that Ijarah Sukuk became dominant Sukuk trucuture in terms of issuance volume in 2008, replacing Mudarabah which was the dominant structure in 2007. 'Early in 2008, the Accounting Auditing Organisation for Islamic Financial Institutions (AAOIFI) recommended that Islamic finance market participants should refrain from issuing Sukuk structures that have a purchase undertaking or a guarantee from the Sukuk issuer to repurchase at a specific price at a future date. This is because AAOIFI believed that this structural mechanism is not compliant with a fundamental principle of Shari'ah, namely profit and risk-sharing,' Mr. Hijazi explains.

At the same time, Sukuk issued through securitisation became a mainstream financial vehicle. One of the key fundamental objectives of Shari'ah is asset ownership and the sharing of profit and losses, which are features of many asset-backed Sukuk structures, including Mudarabah, Musharaka and Investment partnership.

AAOIFI standards are widely followed (without obligation) across many countries, but are only adopted by Bahrain, Dubai International Financial Centre in the UAE, Jordan, Lebanon, Qatar, Sudan and Syria.

'Moody's has followed the Sukuk market closely over the past few years and even more closely since the start of the ongoing global crisis. We will continue to monitor the development of the market as it strives to favourably balance the market turmoil and ideological principles,' Mr. Hijazi concludes.