They did this by creating bonds based on profit-and-loss sharing, since Islamic law forbids making money through interest. Mr. Salib says Islamic bonds are stable investments because they are offered through subsidiaries of larger banks. Islamic bonds are less liquid than conventional bonds, Mr. Salib says, and thus offer investors a yield premium over conventional bonds. However, Western financial institutions are considering incorporating Islamic bonds into some mainstream indexes, which could lead to higher prices and lower yields as they become more popular. Participation banks are required to earmark a portion of their assets for projects that benefit local communities and businesses, meaning those looking for socially responsible investments also could be adopters of Islamic bonds.

Source: Wall Street Journal September 05, 2016 02:01 UTC