LONDON, 13 March 2008 — The UK government took a step nearer to issuing a debut sovereign benchmark Islamic bond (sukuk) when Chancellor of Exchequer Alistair Darling confirmed in his Budget 2008 speech to a packed House of Commons yesterday that “the government remains committed to examining this issue and in the Finance Bill 2008 will take legal powers to facilitate any potential future issuance.”
The chancellor stopped short of announcing that the UK would actually issue a sukuk, instead promising that an update to the work on a sukuk program, including a response to the recently closed public consultation on the issuance of a sukuk in the wholesale sterling market. Darling told the House of Commons that, “a final announcement on the outcome of that work at this time would be premature, given the range of issues being considered”.
Following a commitment made in April 2007, the UK government has been examining the feasibility of a sovereign sukuk issuance. The fact that the UK Treasury is taking powers in the Finance Bill 2008 to issue a sukuk should the occasion arise in the near future, is a positive sign of the Labour government’s intent and commitment to the Islamic finance sector in the UK.
This is in stark contrast to the uttering of the two opposition parties, the Conservatives and the Liberal Democrats who have deliberately sought to play up the so called “religious and tax” implications of the issuance of a UK sovereign sukuk, especially when there are none other than the status quo for all issuers out of the UK, irrespective of race or creed.
The sensationalist tabloid Daily Mail recently ran a front page story warning that prime UK government assets would be flogged off to Muslims should the Treasury issue a sukuk. The right-leaning Daily Telegraph, which also supports the Conservative Party, on Feb.26 published a story warning that “the move (to issue a sukuk) could lead to wealthy Middle East businessmen and banks taking ownership of government buildings and other British assets.”
The daily quoting a Treasury official added: “We want the City of London to be one of the gateways globally for Islamic financial products and we want it to be competitive on all products you can imagine, so we should be competitive on Islamic finance as well as any other.”
The UK opposition obviously seemed to have failed to grasped the nettle of the pre-eminence of the City of London and its long history of structuring Islamic financial products going back to 1983 when Citibank in the Strand structured the first Islamic corporate finance transaction for Shell Malaysia.
Saudi International Bank in London a year later structured the first Islamic structured finance deal.
According to the Daily Telegraph Senior Conservative MP Edward Leigh, chairman of the House of Commons Public Accounts Committee, warned that he was “concerned about the signal this (the issuance of a UK sukuk) would send - it could be the then edge of the wedge. British common law must be supreme and should apply to everyone.”
Such views unfortunately betray a fundamental misunderstanding of Islamic finance and the UK’s intentions concerning it. The message a UK sukuk issuance will send, in fact will benefit the City of London more than any other stakeholder. British financial engineering expertise and legal expertise are already dominating the structuring of Islamic financial products, especially the sukuk. City law firms such Clifford Chance, Denton Wilde Sapte, Norton Rose, Trowers & Hamlins, Lovells, Dechert and others are leading the world in Islamic finance structuring and documentation.
Similarly, the UK taxpayer will benefit from the tax that will be generated from Islamic transactions, albeit mitigated to minimize the tax burden as all financial transactions, whether conventional or Islamic, seek to do; and this will also contribute to employment both in the City and associated projects financed by a sukuk issuance or other Islamic financings.
True, sukuk certificate holders would also benefit, but this does not mean that they would have absolute ownership of prime UK assets. In reality, they have ownership of the “usufruct” (the use of the assets) over the tenor of the sukuk or bond issuance, after which the absolute ownership reverts to the UK government. This is particularly true of a sukuk Al-Ijarah that involves a sale-and-leaseback arrangement.
For instance, if the UK Treasury were to issue a sukuk to finance one or two of the projects involved in the London 2012 Olympics, then the athletes’ village, say, could be built from the sukuk proceeds, which after the Games are finished could be retrofitted into housing units. The rental of the units would be used to pay periodic returns to sukuk certificate holders till the maturity of the sukuk, after which the ownership of the housing units would be handed back to the UK government or Stratford Council. There would be no burden on the UK taxpayer let alone on the government.
How this sort of structuring can send the wrong signal is beyond comprehension. Unless of course Leigh is implying that if the Treasury gives in to Shariah finance, then the UK Government would also ostensibly give in to other demands, such as Muslim personal law relating to divorce and inheritance.
