On the 25th June 2014, the UK government became the first country outside the Islamic world to issue sukuk, the Islamic equivalent of a bond that complies with Islam’s prohibition against interest. Having managed to hold off competition from South Africa, Hong Kong and Luxembourg, the government confirmed that £200 million of sukuk, maturing on 22 July 2019, have been sold to investors based in the UK and to the major hubs of Islamic finance around the world.
Whilst sukuk are similar to typical bonds, they are structured to abide by Shariah law, which forbids interest payments. They abide by an ijarah structure, meaning the bonds are backed by defined existing assets, allowing Islamic investors who can’t buy traditional debt to receive rental income and share in profits. Investors in the U.K. inaugural sukuk will receive rental payments based on the lease of three central-government properties, the Treasury said, with strong demand resulting in good value for money for the British taxpayer.
The UK’s five-year Islamic bond is set at the same rate as the yield on the UK’s equivalent government bond, paying out an annual “profit” of 2.036 per cent. The bond was structured by HSBC, which also managed the sale along with Barwa Bank, CIMB, National Bank of Abu Dhabi and Standard Chartered.
The bond attracted £2.3 billion in order, more than 10 times the amount it was looking to sell. Approximately a third of the issuance went to Islamic banks currently operating in Britain, for whom this is a welcome opportunity to buy sterling-denominated interest free assets. The Bank of London and the Middle East (BLME), Britain’s largest stand-alone Islamic bank, said considering the high demand, it was satisfied with its allocation. The issue was settled on the 2nd July 2014 in order to be listed on the London Stock Exchange.
According to The Financial Times, some of the UK’s largest property companies have already expressed interest in the idea of raising finance through Islamic bonds. Global sukuk issuance already stood at $21.6 billion in June, the highest amount in this month since records were compiled for such deals in 2008.
“Today’s issuance of Britain’s first sovereign sukuk delivers on the government’s commitment to become the Western hub of Islamic finance and is part of our plan to make Britain the undisputed centre of the global financial system,” the Chancellor of the Exchequer George Osbourne said.
Despite its initial achievements, some analysts are skeptical as to whether this comparatively small issuance is enough for the UK to make its mark on the Islamic finance market. Khalid Howladar, Moody’s global head of Islamic finance, said that the “modest” 200 million pound sukuk issuance “really doesn’t move the dial in terms of the $60-65 billion in global sukuk issuance expected this year.” The choice was also notable for excluding all of Britain’s six full-fledged Islamic banks from the mandate.
Currently the ijara structure means the size of the sukuk cannot be significantly greater than the intrinsic value of assets, 200 million pounds. For some analysts, more frequent issuance and the participation of private banks is also needed to establish a firm sukuk market out of the UK.
However, when speaking at a Euromoney conference, Robert Stheeman, chief executive of the UK Debt Management Office described the bond sale as a political decision and not a way to meet British public funding needs.
“At this stage it’s planned just to be a one-off,” Stheeman said. “It has not proven easy to find sufficient assets either for bigger size or for a programme of issuance. But we are pleased with the result.”
Thus, whilst Britain’s sukuk has been met with success, the future remains uncertain as to how the UK government plans to expand and utilize its presence within the enormous realm of Islamic finance.