LADB Blog Considers International Investment in Mexican Oil Industry

November 25, 2014

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.

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.

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".

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About LADB

The Latin America Data Base (LADB) is one of the longest running premier news and educational services on Latin America. Established in 1986 as a unit of the Latin American and Iberian Institute at the University of New Mexico (UNM), LADB has had an internet presence since 1996. LADB features three weekly electronic publications: NotiCen, NotiSur, and SourceMex, and a fully searchable archive of over 28,000 articles that provide timely information and historical perspective on a variety of Latin American issues. LADB is a subscription service made available at no cost to the UNM community. For more information, contact vnelson@unm.edu. To keep apprised of current events in Latin America, follow LADB on Twitter @LADBatUNM.