Doubts cast over UK sukuk

Britain's plan to issue the first Islamic bond from a Western government will strengthen its position as a centre for sukuk trade, but it may miss a chance to develop Europe's interest-free banking industry.

Doubts cast over UK sukuk

World Bulletin / News Desk

Britain's plan to issue the first Islamic bond from a Western government will strengthen its position as a centre for sukuk trade, but it may miss a chance to develop Europe's interest-free banking industry.

Last week, Britain mandated five banks to arrange a 200 million pound ($336 million) sukuk issue, part of Prime Minister David Cameron's effort to protect London against competition from other sukuk hubs such as Luxembourg, Dublin, Dubai and Kuala Lumpur. The sukuk could be issued in coming weeks, subject to market conditions.

Britain's choice of big institutions with considerable marketing muscle such as HSBC, Qatar's Barwa Bank, Malaysia's CIMB, National Bank of Abu Dhabi and Standard Chartered appeared designed to ensure easy distribution and tight pricing.

But the choice was notable for excluding all of Britain's six full-fledged interest-free banks; none was included in the mandate.

“The UK government's inaugural sukuk transaction is a good step forward as it will create a benchmark and open the market for other UK issuers,” Apostolos Bantis, emerging markets credit analyst at Commerzbank in London, told the Finanical Express.

“However, this particular issue is unlikely to have any major impact right away. There needs to be more frequent issuance and also participation of private banks and corporates to establish a sukuk market out of the UK.”

One of the major interest-free banks in Britain is Bank of London and the Middle East, Europe's largest stand-alone Islamic bank, which is building stronger links with the Gulf - last year it opened an office in Dubai and listed its shares on a Dubai bourse.

“Naturally we are disappointed that no UK Islamic bank has been selected as an arranger as this would be a further opportunity to champion the UK Islamic finance market,” said chief executive Humphrey Percy.

Interest-free banks in Britain have lacked a wide range of highly rated, sharia-compliant, sterling-denominated instruments that can be used - and even traded - to manage their funds. Both BLME and European Islamic Investment Bank, another London-based institution, said they planned to buy the British sukuk on behalf of clients and for their own liquidity purposes.

The sukuk's structure looks likely to limit the extent to which the issue could be expanded if demand proves heavy. Britain will use an ijara structure, a sharia-compliant sale and lease-back contract, under which the rental income of three central government offices will underpin the transaction.

Last Mod: 18 Haziran 2014, 15:57
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