While banks continue to keep a tight rein on their purse strings, businesses increasingly are turning to new funding avenues. At least a few management teams see a recovery – albeit shaky – under way, with the S&P 500 up about 14 percent for the 12 months ending in June, and manufacturing activity continuing to grow. Execs want to move ahead with investments to boost productivity, expand market share, or launch new products. That’s the conclusion of a recent report by Celent.

To get there, a small but growing number of firms are turning to Islamic finance, Celent reports. Islamic banks across the world hold more than $900 billion in assets, including $114 billion of Sukuk, or financial certificates that are similar to bonds but comply with Shariah, or Islamic law. Among other restrictions, Islamic law prohibits the paying of interest. Instead, bondholders are paid from the cash flows generated by specific assets, which are placed in a special-purpose vehicle as part of the deal, Celent notes.

To be sure, the end result sounds awfully similar to interest payments, a point made by Parvez Ahmed, a professor of finance at the University of North Florida in this piece on the Huffington Post. Even so, the Islamic finance sector is expanding. This 2009 report by the Congressional Research Service (CRS) puts the annual growth at between 10 and 15 percent. Major multinational banks, including HSBC and Deutsche Bank, have expanded their portfolio of Islamic-compliant lending products, Celent notes. Moreover, while the Islamic financial market traditionally has been concentrated in the Mideast and Southeast Asia, it’s expanding in other regions of the world, including the U.S.

Among the reasons for the growth: Islamic banks tended to avoid the more speculative investments and transactions that led to the downfall of some of their high-profile Western counterparts, the CRS report notes. In addition, high oil prices have generated significant wealth in the Mideast, this report from PricewaterhouseCoopers notes.

The global issuance of Islamic bonds, including both corporate and sovereign issues, rose from $7.2 billion in 2004 to $46.7 billion in 2007, before falling to $15.8 billion in 2009, the CRS report states. Last year, GE Capital sold $500 million in Sukuk. Just today, Nomura Holdings Inc., a Japanese financial firm, announced that it was planning to issue $100 million in a 2-year Sukuk.

The growth of Islamic finance brings with it several concerns. Some analysts worry that Islamic financing inevitably funds terrorism, while others respond that America’s money-laundering and know-your-customers laws work to prevent that. One discussion on this subject plays out within this article on Fox News.

For corporate treasurers, the more immediate concern is ensuring a clear understanding of just how Islamic financing works, and the risks it holds. As the Celent report notes, while Sukuk pays bondholders with the funds generated from specific assets, the bonds typically are not asset-backed. Instead, investors own the cash flows but not the assets; the bonds are unsecured. On the other side of the transaction, some companies may issue Sukuk as a way of positioning themselves within the Islamic market. CFOs headed on this route should understand that even Islamic scholars are not in complete agreement when it comes to interpreting Shariah, and practices vary by country. As with any financial transaction, knowing exactly what you’re getting into is critical. ###