Sukuk (aka Islamic bonds) are Sharia-compliant bonds which do not pay interest. Instead, they give the bond holder partial ownership of an asset and allow them to collect a portion of the income or rents that the asset generates. At the end of the term, the bond holder doesn’t necessarily get all of their initial investment back. They share in the downside and the upside of the asset in the event that the asset depreciates or appreciates.
Some of the biggest issuers of Sukuk are Islamic countries like Malaysia, Bahrain, and Qatar, as well as large Middle Eastern companies like Islamic Development Bank and Saudi Electricity Company. The first non-Muslim entities to issue Sukuk were the United Kingdom and Hong Kong. The equivalent interest rate in both cases was around 2%. In the case of the £200 UK offering, the issue was massively oversubscribed (to the tune of 11.5 times).
The reason the U.S. government should consider selling Islamic bonds has nothing to do with political correctness, diversity, or anything of that nature. The decision to sell Islamic bonds would come to whether the U.S. can take advantage of extreme pent up demand in order to lower its borrowing costs, and whether wield influence over adversarial countries by forcing them to become more dependent on the stability of the U.S. and its currency. The U.S. could potentially sell an Islamic bond in the form of a portion of rents against some so-so public housing, or some other asset without much upside. Relative to its entire borrowing, the Islamic bond would likely make up an extremely small portion.
The U.S. Might Be Able to Borrow at Close to Zero
The pent up demand for ‘safe’ U.S. government securities that were compliant with Sharia law would be beyond massive. While only 1% of U.S. citizens are Muslim, the marketplace for U.S. Treasuries is worldwide. Approximately 23% of the world is Muslim. Foreign banks, countries, Sovereign wealth funds, and many other entities would load up on U.S.-issued Sukuk. Additionally, since Sukuk can only be bought or sold at par value, most of them are held to maturity. The bonds could be issued with 20 or 30 year terms without any real concern about them ever selling at a discount. Right now, Sharia-compliant mutual funds keep all of their excess cash parked in bank accounts which yield zero interest. If they could get any non-zero amount in the form of U.S. Treasuries, they would likely load up.
Islamic Countries and Companies Could No Longer Afford to be Adversarial
There is a famous quote by J. Paul Getty, “If you owe the bank $100 that’s your problem. If you owe the bank $100 million, that’s the bank’s problem.” The amount of Sukuk the U.S. would issue would likely be minuscule compared to its overall borrowing level. However, for an individual country or company, it could be a large amount of money. It would force interdependence on other countries in a way that only money can. Doing anything to de-stabilize or harm the U.S. could suddenly become detrimental to their own economic health. That is the idea behind foreign aid, but unlike in foreign aid, the money would be coming to the U.S. from these countries, rather than simply being given away. In the event that a foreign bond holder does something adversarial, the U.S. could even place regular payments into an escrow account until the behavior is changed and restitution is made.