LONDON: Bankers in London were disappointed by last-week’s announcement by British Chancellor of the Exchequer Alistair Darling in the Pre-Budget Report (PBR), He said that the UK Treasury would not be issuing a debut sovereign sukuk (Islamic securities) in the wholesale sterling market at the present time.
However, some Islamic bankers in the City advise that given the current financial crisis and the recession in the UK, the Treasury’s action is perhaps understandable and should not be construed as the Brown government’s getting cold feet in its commitment to issuing a sukuk or toward developing Islamic finance in the UK.
The Treasury, in an official statement, stressed that “after having considered these factors, the (UK) government has concluded that issuing sovereign sukuk would not offer value for money at the present time but it will keep the situation under review.” In fact, the Treasury’s Islamic Finance Experts Group (IFEG) is due to meet on Dec. 10 to discuss the situation and to review the results of the Treasury’s consultation exercise on the possible issuance of the sukuk. The official response to the consultation is due for publication in January 2009.
The UK government, it seems, is caught between two points — its requirement for good orderliness and confidence in the sukuk market on the one hand; and meeting the cost efficiency and pricing objectives for government issues of its debt management office on the other hand.
The good news is that, according to City Minister Ian Pearson, “The government is committed to promoting the City of London as a center for global Islamic finance and to working toward a level playing field between conventional and alternative financing instrument.” As such, the government announced in the PBR that “new legislation will be introduced in the finance bill of 2009 to provide relief from stamp duty land tax for alternative finance investment bonds. And in conjunction with the FSA, the government will examine the regulatory treatment of sukuk (alternative finance investment bonds) in the UK and will consult on this issue in the near future.”
Richard Thomas, CEO of Global Securities House (UK) and chairman of Gatehouse Bank, the latest Islamic bank to be authorized by the Financial Services Authority (FSA) in the UK, is confident that the UK sovereign sukuk is “work in progress.” He stresses that the fact that Whitehall is pushing ahead with the sukuk measures in the finance bill indicates that the Brown government is committed to a sukuk issuance, albeit this would depend on the pricing and timing.
“The Treasury will only finish its consultation in January 2009. The finance bill will only be published sometime in May 2009. By the time the bill gets royal assent and the structure of the sukuk is finalized it would be almost the end of 2009. So even if the UK government wanted to issue a sukuk, realistically it would not have happened before the end of 2009 or early 2010. In any case, with the current UK government pricing for a debut sovereign sukuk, no investors would buy it. The Islamic finance sector is return-driven. Therefore it would not be efficient or offer value for money to issue a sukuk currently,” he explains.
According to the Treasury, the factors which contributed to the government’s decision include the current situation in world financial markets, including sukuk markets; the government’s debt management policy of minimizing long-term costs of debt issuance while taking into account risk; the size and nature of potential demand for UK government wholesale sterling Islamic financial instruments; the potential cost and risk characteristics of wholesale sovereign Islamic financial instruments including in relation to the cost and risk characteristics of the government’s debt portfolio; any implications for the Government’s established financing strategy; the experience of other sovereign issuers of wholesale Islamic financial instruments; and the impact on the markets, including the development of London as an international center for wholesale sterling Islamic financial instruments.
However, the irony remains that while Prime Minister Gordon Brown is championing the introduction of fiscal stimulus packages by governments in the G-20 countries and urging banks to lend more so as to encourages consumers to spend more, the Brown government seems to be retrenching on an off-balance-sheet opportunity of raising billions of dollars through a sukuk issuance to finance Britain out of the recession.
In normal times, yes governments would look at the pricing and demand for its Treasury bills or bonds in the financial markets. But these in Darling’s own words are “extraordinary times.” Perhaps the Treasury is oblivious of the symbolic political and market importance of the issuance of a debut UK sovereign sukuk. Governments — both in Europe, the Middle East and Asia — and financial institutions are keen to follow the UK in issuing sukuk. But as Nazmi Camalxaman, general manager of CIMB Group’s London branch, explains, “they are all waiting for the UK sovereign sukuk, because it will set the benchmark especially of other potential originators on the developed countries. With the UK sukuk delay, it looks like it would take much longer for the development of a euro sukuk market. This is a big disappointment.”
Camalxaman advises another option for the UK government. He would like the UK government to follow in the footsteps of the World Bank, the International Finance Corporation and the Islamic Development Bank (IDB) to issue a Malaysian rinngit-denominated sukuk because there is high demand for such issuances in Malaysia. Similarly, many foreign sovereign entities such as the Industrial Bank of Korea and the Korean Export-Import Bank have issued conventional bonds in the ringgit market. “The market in the Middle East,” he stresses, “is very yield-driven. But in Malaysia it is credit-driven. There is a good appetite for AAA-rated issues. The UK government should seriously consider issuing a ringgit-denominated sukuk, and later swap it into US dollars or even sterling.”
For bankers such as Richard Thomas, there is another reason why they want to see a UK sovereign sukuk issuance. “We need a risk-free bond for our balance sheet purposes. Until we get a benchmark yield such as the UK government issuance, you will not see the establishment of a sukuk fund of funds,” he explains.
The UK’s five Islamic banks and 20-odd financial institutions which offer Shariah-compliant financial products currently cannot use the local money markets because there are no Shariah-compliant papers to invest in.
In this way, a UK sovereign issuance series would not only set a benchmark and yield curve history, but would also serve to revitalize confidence in a sukuk market, which CIMB Islamic Bank CEO, Badlishah Abdul Ghani, confirmed “has dried up”.
There could be a vital synergy with the IDB which is reportedly considering a series of sukuk or MTN issues, whose proceeds would be used to support member countries affected by the global financial crisis. The IDB, a AAA-rated entity, has issued sukuk in the past at competitive pricing.
Perhaps as part of its strategy of issuing sukuk to help its member countries, the IDB could offer to underwrite or guarantee half of a potential UK sukuk issuance. This would give the UK Treasury some comfort about market and uptake concerns and might help to restore much-needed confidence in the sukuk market.
