The UK government is assessing the potential for the world's first sterling-denominated sukuk, while Islamic banks continue pouring into London.
The UK Treasury's Debt Management Office chief executive Robert Stheeman delivered a bullish update of the government's feasibility report, which began in April 2007, on the potential for issuing the world's first sterling denominated sukuk at this year's Euromoney Islamic Finance Summit, held in London on 6-7 February. Stheeman also requested the assistance of the delegates,which gathered senior Islamic bankers,mainly fromAsia and the Gulf, to answer some of the challenges and questions that came out of the study.
"The UK government is looking into issuing a sterlingdenominated sukuk as a clear signal of its commitment to Islamic banking," he said:"We are determined to do everything we can to deliver greater opportunities for British Muslims and also to entrench London as a leading centre for Islamic finance in the world," which recalled the statement made by the then economic secretary Ed Balls in 2007.
Integrating British Muslims has become a serious issue in the UK, and Islamic banking is one way the government can offer services to reintegrate ethnic minorities into the wider British community. With the success of the global sukuk market, estimated to grow in the range of 10-15%/yr for at least the next three to five years, London is looking to tap this wealth.
But the feasibility study still has a number of questions to answer before a sterling-denominated sovereign sukuk is issued. According to the study, these include: an assessment of the advantages and risks associated with issuing a sukuk, since it would be an innovation for the UK; the sukuk's impact on sharia-compliant retail offerings; structural issues, such as the use of an ijara contract; minimising differences between sukuks, bonds and Treasury bills, and assessing the demand and characteristics of 'bond-like' sterling sukuks.
Another issue is locating a government asset, such as a building, suitable for transferring to a special purpose vehicle, which is needed to meet the requirements of an asset-backed bond, rather than a debt-based conventional bond. Stheeman said the difficulty was finding "an asset with sufficient size the Treasury itself doesn't own many assets, which means we would have to look to other government departments," presenting another host of issues.
A number of steps have been taken to develop Islamic banking in the UK. Stheeman announced that government-backed savings scheme National Savings and Investments was looking into issuing sharia-compliant saving packages and will report back in the spring. Since 2003, the government has been making changes to tax and other regulations to accommodate Islamic finance in the UK. The first tax legislation relating to stamp duty land tax (SDLT) was introduced in the 2003 Finance Act. This removed a major obstacle of paying multiple SDLT on Islamic mortgages. In 2005, regulations were laid for Islamic saving schemes, and a 'level playing field' was created for tax purposes for Mudaraba and Murabaha products. Islamic mortgages were also given the go-ahead by regulator the Financial Services Authority (FSA). Financial arrangements such as diminishing musharaka, wakala contracts and ijara wa iqtina were given approval in 2006. In the Finance Act 2007, the government introduced legislation establishing tax treatment for sukuk.
New Kuwaiti-backed bank
The number of Islamic banks in the UK is steadily on the rise with the new Kuwait-backed Gatehouse Capital soon to open, pending its application approval from the FSA. Gatehouse is a sharia-compliant investment bank focusing on Islamic capital markets and asset management. It is a subsidiary of The Securities House, a public Kuwaiti investment company.
Others include Islamic Bank of Britain,Bank of London and the Middle East and European Islamic Investment Bank.
© Gulf States Newsletter 2008
