The UK has issued its inaugural £200m Islamic bond, having managed to hold off competition from South Africa, Hong Kong and Luxembourg to become the first western country to issue debt that complies with Islam’s prohibition against interest.
The Islamic bond – or sukuk– will mature in July 2019, and is structured as an ijarah, a popular sale-and-leaseback mechanism that means investors get paid a fixed rental income on properties placed in the structure rather than conventional interest, FastFT reports.
The deal was more than 10 times oversubscribed, highlighting the demand for the sukuk, with the order book exceeding £2bn. The “profit rate” was priced flat to the UK conventional gilt maturing in July 2019, or 2.04 per cent.
HSBC, Barwa Bank, CIMB, National Bank of Abu Dhabi and Standard Chartered are managing the UK’s debut sukuk issue.
The UK has been working on a sukuk sale on and off for years, hoping to burnish its reputation as an international hub for Islamic finance and attract more investment from Muslim countries and financiers.
Khalid Howladar, head of Islamic finance at Moody’s, said: “The UK government is looking to maintain its position as a strong financial centre by targeting a sizable share of the financial services activity that is associated with this fast growing sector.
“While a solid Islamic banking base is necessary to become a true universal Islamic finance hub, there’s no doubt that supporting the industry and its service providers will enable London to maintain a share of the global sukuk market - particularly given the pre-eminence of English law in sukuk transactions.”
Some background on the little-known but thriving Islamic finance industry can be found in this FT article from earlier this summer. From that piece:
‘Some sceptics may blanch at the government rolling the red carpet out for a little-understood industry that adheres to sharia, or Islamic, law. Yet the attractions are obvious. From humble beginnings just a few decades ago, the global Islamic finance industry is expected to hit $2tn this year – extending to banks, mutual funds, insurance, private equity and even some (contentious) hedge funds.
‘“The more I looked at the industry the more I realised that it was a no-brainer,” says Baroness Sayeeda Warsi, a Foreign Officer minister and co-chair of the government’s Islamic finance task force. “The figures are incredible.”’
The UK is in no need of an additional funding tool, thanks its big and vibrant gilt market, but some countries and companies are more in need of some ready financing: Libya is now considering issuing a sukuk to off-set the loss of oil revenues, Reuters reported today.