Prime Minister David Cameron will unveil today the UK’s plans to become the first country outside the Muslim world to sell a Shariah-compliant bond as soon as next year.
Cameron will lay out the UK’s intentions at the World Islamic Economic Forum in London, according to excerpts of a speech released by his office. The Islamic bonds, known as sukuk, would be valued at about 200 million pounds (US$320 million). Cameron will also say that London Stock Exchange Group Plc is creating an Islamic market index.
The policy is a reversal from the position that Robert Stheeman, chief executive officer of the UK’s Debt Management Office, set out in a September 25 interview. Stheeman said then that offering sukuk is "not going to be value for money" and that something would need to change before Britain would shift its view.
"It’s just never quite happened," the prime minister will say today, according to his prepared remarks. "Changing that is a question of pragmatism and political will. And here in Britain we’ve got both. This government wants Britain to become the first Western sovereign to issue an Islamic bond."
Islamic bonds are typically backed by assets or cash flow because of the religion’s ban on interest. About 60 per cent of the world’s sukuk is issued from Malaysia, according to Malaysia International Islamic Financial Centre.
The lack of highly rated sterling sukuk constrains Islamic lenders in the UK because the Bank of England requires them to hold easy-to-sell assets as protection against short-term funding shocks, according to ABC International Bank Plc and Bank of London & the Middle East, or BLME. Islamic finance should be as British as "fish and chips," London’s lord mayor, Roger Gifford, said at a sukuk summit in June.
Islamic financial assets are growing 17 per cent a year and are set to reach US$2.67 trillion by 2017, up from US$1.21 trillion now, PricewaterhouseCoopers LLP said in a July report.
"Already London is the biggest center for Islamic finance outside the Islamic world," Cameron will say, according to the excerpts. "And today our ambition is to go further still. Because I don’t just want London to be a great capital of Islamic finance in the Western world, I want London to stand alongside Dubai as one of the great capitals of Islamic finance anywhere in the world."
The government established an Islamic financial task force in March to bring together policy makers and industry officials to review subjects ranging from banking regulation to standards for Islamic finance education.
Other than those of the Jeddah, Saudi Arabia-based Islamic Development Bank, top-ranked sukuk are sparse. Sovereign Islamic bond issuers include Qatar, which has the third-highest investment grade at Moody’s Investors Service and Standard & Poor’s. Britain had its top-notch credit score cut by one level at Moody’s and Fitch Ratings this year, while it retains a AAA rank at S&P.
Global Islamic bond sales declined this year after reaching a record US$47 billion in 2012 as speculation the Federal Reserve will start tapering monetary stimulus pushed up borrowing costs. Sukuk sales have fallen 18 percent to US$33 billion this year through October 28, according to data compiled by Bloomberg.-- Bloomberg