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The first European-backed Islamic bond

Islamic finance has broken another barrier with news of the first European based and backed Islamic bond (sukuk) to be issued by the German state of Saxony-Anhalt. The ?100 million of sukuks will be issued at the end of July. The bonds, which must comply with sharia?ah rulings, do not represent borrowing by the named entity, the most notable prohibition with sharia?ah compliance being the illegality of interest bearing accounts. A further complication is the existence of four schools of Islamic law which can provide differing interpretations on compliance.

The move by the German state follows the Islamic Development Bank?s $400 million issuance in September 2003 and the $600 million deal backed by the Malaysian government in 2002. Bahrain, Qatar, Lebanon and Turkey have all issued Islamic-bonds.

Neale Downes, a partner at Trowers & Hamlins, the international law firm, comments: ?There is a growing acceptance that Islamic financial instruments can compete with conventional financial tools.?

The Islamic finance market has been achieving growth of 15% a year while the Bahrain Monetary Agency notes the value of Islamic financial instruments has grown from a negligible base to $230 billion.

Salim Naboo, with Allen & Overy, adds: "The Islamic market is in its infancy and building an investor base as well as developing the technology will be important."

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