Debates over how sharia-compliant Islamic bonds really are have "wrecked" the sukuk market, causing issues to fall to $14 billion this year from up to $50 billion last year, a leading expert said on Tuesday.

"The statements that were made by our sharia chairman about the sharia compliance of sukuk wrecked the market," said Mohamad Nedal Alchaar, secretary-general of the Accounting and Auditing Organization for Islamic Financial Institutions.

Sheikh Muhammad Taqi Usmani, chairman of the board of scholars at Bahrain-based AAOIFI, roiled Islamic bond markets in November 2007 when he told newswire Reuters that about 85 percent of sukuk did not comply with Islamic law because of repurchase agreements.

Most Gulf Islamic bonds have been sold with a repurchase undertaking -- a promise that the borrower will pay back their face value at maturity, or in the event of default, mirroring the structure of a conventional bond.

A promise to pay back capital violates the principle of risk- and profit-sharing on which such bonds should be based, Usmani said.

"The market was halted, and still... we have not completely cleared ourselves from the negative consequences," Alchaar said.

Lack of standardisation has been repeatedly highlighted by the Islamic finance industry as one of its key constraints. Islamic law is open to interpretation, leading to variations in banking and financial practices across the industry.

Contacted by Reuters, Usmani declined to comment on Alchaar's remarks on Tuesday.

Usmani said in June most Islamic bonds should be treated as equity instruments, marking a shift for Muslims seeking fixed-income returns.

Bond sales have almost dried up in the second half of this year as the global credit squeeze has raised borrowing costs, prompting many Gulf borrowers to shelve sukuk sales as banks become more reluctant to lend.

Alchaar told a conference in Dubai that only $14 billion worth of sukuk had been issued so far this year, compared with $40-50 billion last year.

Speaking to Reuters, Alchaar said he expected next year's sukuk issuance to be "way more than this year", without elaborating.

Sukuk are designed to comply with an Islamic ban on the receipt of interest. Instead, returns are derived from underlying physical assets, such as property. (Reuters)