MANAMA: The Islamic bond market has suffered badly during the economic downturn, but recent events could help the sukuk industry create future benchmarks.

Bahrain-based NCB Capital chief economist, Dr Jarmo T Kotilaine, believes that the fallout from the downturn could help sukuk create their own identity in the market.

"At present, whether sukuk are Sharia-compliant is a matter of interpretation from different Sharia boards," he said.

"Initially sukuk wanted to mimic the conventional bond markets, but that is how new markets get started. Now they can move to where they have their own identity."

He said that while traditional bonds could guarantee a return and money back this could not be the way with sukuk if the bond was truly Sharia-compliant.

"In Sharia-compliant bonds you can guarantee the value of the bond at the end of its term," he said.

"What we will have to see is sukuk that involve a bit more risk taking and risk sharing. That is more in the spirit of Sharia. But it remains to be seen if all sukuk issues are seen to comply with this," he added.

"The sukuk market has slowed down dramatically," he said.

"It was vulnerable because it was new and a fragmented market and was tested more than the established market.

"Many countries at the forefront of sukuk are oil producers and were hit by the fall in the oil price and this gave these countries an opportunity to pause for thought.

"What we can look forward to now is sovereign funds that will emerge and provide the benchmark for sukuk in the future."