PEMEX and Shari’ah Law

Photo: Magister Mathematica, Wikimedia Commons

Mexico’s state-run oil company PEMEX, hurting from the global decline in oil prices, is looking for new ways to raise capital. In an attempt to spur new international investment in 2015, the Mexican government is considering the possibility of issuing Sukuk Bonds, a type of bond compliant with Shari’ah law (Islamic moral code). Because Shari’ah law forbids the charging or paying of interest, certain Islamic governments and financial institutions that seek to invest in global markets will only do so if Sukuk bonds are issued in the place of conventional bonds. Responding to the rapid growth of wealth and investment among the Islamic monarch member states of the Gulf Cooperation Council (GCC), Sukuk bonds have grown tremendously over the last 10 years.

According to Scotiabank’s Sukuk division, total outstanding Sukuk rose from US$8 billion in 2003 to well over US$243 billion in 2012. Together, the GCC and Malaysia account for over 90% of all issued Sukuk bonds. By issuing Sukuk bonds to lure Muslim investors, the Mexican government would be joining the UK, the US, Canada, Thailand, Singapore and Sri Lanka in a rising global trend of government-issued Sukuk bonds. Mexico would be the first Latin American country to issue Sukuk bonds. For more on PEMEX’s plans to boost investment, see the Nov. 19 issue of SourceMex.

The difference between sukuk and conventional bonds
Conventional bonds are paid back with interest, while sukuk bonds are paid back with a share of assets. Because the payment of interest is prohibited in shari’ah law, Sukuk bonds skirt around that prohibition by replacing interest payments with a promise to share profits. Essentially, purchasing a Sukuk bond is much more like purchasing shares in a company, while a conventional bond represents the purchase of debt to be repaid with matured interest.

Photo: Akif Sahin. Flickr

 Why does shari’ah law forbid interest?
The prohibition of interest, or Riba as it is called under sharia law, is rooted in the writing of the Quran. Saleh Majid, a lawyer representing Islamic Banking laws in Germany and the UK, explains that the prohibition of Riba came gradually, and is based on an interpretation of Verse 2:275, which states that “Allah permitted the sale and forbade Riba,” and that “Every loan which attracts benefit is Riba.”

The principle underlying this prohibition is the need to prevent usury, or the accumulation of unearned accretion of capital… essentially what we call loansharking. Due to varying interpretations of the Quranic verse, and varying methods of implementing it in modern law, each Islamic government has its own particularities. Even Jewish and Christian scripture discourages the use of interest on loans. In fact European banking laws have much to do with the rise of Islam and its medieval conquests. As it turns out, Sukuk is the plural of the Arabic sakk, translated to the medieval French, “cheque”, or our modern word “check”.

-Jake Sandler

Also in LADB on Nov. 19-21....

• Mexican Senate Appoints New Human Rights Ombud in Wake of Guerrero Crisis
• Nicaragua Pushes Ahead with Eco-Friendly Overhaul of Electricity Sector
• Killing of Two Paraguayan Journalists Highlights Narco-Corruption Issue
• Peruvian Business Associations Hoping to Hack Away at Workers’ Rights
• Planned Container Terminal in Costa Rican Port Brings Second Strike in Two Years

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