LONDON, 26 November 2007 — The Debt Management Office of the UK Treasury published its long-awaited consultation document on Government Sterling Sukuk Issuance last Wednesday and the Treasury Minister leading the work on the UK’s possible Sukuk (Islamic bond) issuance debut, Kitty Ussher, has embarked on a three-month consultations process which could culminate in the Treasury putting through the necessary legal changes that might be required for the issuance in the spring budget in 2008.
This is good news for the Islamic capital and debt markets because there were some doubts about whether the UK government was indeed committed to seeing through a Sukuk issuance debut, initially for benchmark purposes, following the departure of Ed Balls, the then economic secretary to the Treasury in the last administration of Tony Blair, before Gordon took over.
Other reports also suggested that while the UK politicians are committed to the issuance of Islamic debt instruments in the wholesale sterling market, there was a “turf war” between pro- and anti-Sukuk issuance factions among the Treasury civil servants. The anti-Sukuk civil servants apparently believe that the Sukuk structures are too complex and far removed from current UK legislation and government debt management objectives, which, inter alia, prioritizes low transaction costs and cost of issuance of Treasury bills and bonds.
The supporters of a Sukuk issuance believe that it is possible to launch a Sukuk at a competitive price with attractive yields with little or no cost to the UK taxpayer; and that such a move would enhance the City’s Islamic finance credentials and also New Labour’s social and financial inclusion policies.
The consultation document is seeking views on the advantages, disadvantages and risks flowing from any Sukuk issuance. And respondents are asked to submit their views and comments by Feb. 28, 2008.
The government of Prime Minister Gordon Brown wanted to see London develop into an international Islamic trade and finance hub. London is already an emerging international Islamic financial center and the jurisdiction of choice for an increasing number of Islamic transactions including Sukuk issuance. An estimated $30 billion of commodity Murabaha is structured through London each year mainly using contracts on the London Metals Exchange.
The 2007 pre-budget report contained a progress report on the feasibility study into the government’s potential to become an issuer of Islamic financial instruments in the wholesale sterling market. The government reported that it had identified a number of potential benefits of Sukuk issuance flowing to the City of London and to the wider community.
The government also identified a number of potential costs, including the
costs of both structuring and launching Sukuk, as well as other costs that are dependent on the size and nature of the issuance. There are also the risks associated with Sukuk issuance, particularly those relating to price and demand.
In the absence of other Islamic debt benchmarks in the UK, the Treasury is naturally examining the feasibility of issuing Sukuk that would have similar characteristics to either gilts or Treasury bills and would compare favorably with these instruments so that Sukuk issuance would be value for money.
Other issues that need to be resolved prior to any Sukuk issuance include the need for primary legislation to facilitate Sukuk issuance, the identification of assets such as the buildings owned by the government or a piece of infrastructure to facilitate Sukuk issuance and the taxation treatment of assets upon transfer to and from a special purpose vehicle (SPV) and any other taxation or regulatory issues.
The UK progress on Sukuk issuance is basically on two fronts — a wholesale Sukuk and a retail Sukuk. Savings & Investments (NS&I), the government savings scheme run by Royal Mail, is separately examining the feasibility of the UK government becoming an issuer of retail Islamic financial products including Sukuk, which are largely absent from the global market, save in Malaysia and Bahrain. NS&I will be reporting to the Treasury in Spring 2008 on this.
The Sukuk in the wholesale sterling market will either be a “bond-like” Sukuk with a maturity of greater than one year, possibly 5 years; and a “bill-like” Sukuk with a maturity of less than one year, possibly three months.
According to the Treasury, Sukuk Al-Ijara (a leasing Sukuk) and Sukuk Al-Mudaraba (a trust arrangement) are two possible structures that could form the basis of any government Sukuk issue.
