UK’s Maiden Sukuk Comes Over All Coy

Euromoney, March 2014

The UK’s maiden sovereign sukuk issue was announced with considerable fanfare in October, and appears to be making progress. But the British Treasury is not in a rush, and market participants are beginning to wonder what the delay is.

Speaking at a Euromoney Islamic finance conference in London in February, Sajid Javid, Financial Secretary to the Treasury and a former Chase Manhattan and Deutsche Bank executive who is very much the public face of the UK government’s Islamic market ambitions, said the sukuk would now take place “next financial year” – that is, no earlier than April, and potentially not even this year.

Naturally, a sovereign has to be fairly studious and open in its appointment of advisors, and after review settled on HSBC and Linklaters. But with that done, why the sluggish pace?

In one sense, Javid is keeping history in mind in the cautious approach. “The market has long made the case for a sovereign sukuk issued by the UK government, and it is something the government has looked at doing in the past,” he said. “Due to hurdles, it never quite took off.” Asked why it is still not underway, he said: “I actually think that, drawing on my own experiences, it’s not been that long. It is the first for the UK, the first sovereign sukuk by any western country, and it is very important that when the UK issues it has looked at everything in fine detail. It would be in no-one’s interests if it was rushed unnecessarily and there’s a problem that could have been avoided.”

Javid also confirmed that, for the moment, the UK only intends to issue one sukuk. “We have said this is a one-off issuance, not a long-term program, and its main purpose is not financing for the government,” he said. “It is more to develop the UK as a financial centre.”

This attitude clearly makes a certain amount of sense, since the £200 million issue, when it comes, will not make the slightest difference to the UK’s national coffers in comparison to the deep and liquid conventional gilt market. The sukuk, instead, will be a statement: about inclusiveness for the UK’s Muslim community, about London welcoming further investment from the Islamic world, and about the hopes London continues to harbour as a global centre for Islamic finance.

But there is an alternative view, increasingly being muttered by bankers and lawyers in the industry. Just because Britain doesn’t need sukuk for its funding doesn’t mean it shouldn’t continue to build a curve, they say, and it seems something of a waste of effort and research to put all this preparation into a one-off. After all, the hope is that a UK issue prompts other British enterprises to launch sukuk, priced off whatever level the UK issue clears the market at. The more widely established the curve, the greater the opportunity there will be to encourage others to price against it.

There is also a certain amount of market back-chat about the appointment of HSBC to the advisory mandate so soon after the bank had closed down many of its Islamic finance businesses worldwide – including some of its presence in the UK. This objection was levelled at Mohammad Dawood, managing director of global capital financing at HSBC Middle East, by Harris Irfhan, managing director of the European Islamic Investment Bank, at the same event. “Why,” Irfan asked, “should HSBC be rewarded by the British government with a high profile Islamic mandate?”

Dawood responded: “Yes, we have closed down businesses in the UK and in the Middle East,” but countered that HSBC has maintained its presence in the two key Islamic markets of Malaysia and Saudi Arabia. “Our selection was perhaps just a reflection of the experience that has been built up over a number of years. It was a transparent process.”

Market sniping notwithstanding, there are high hopes for the influence the sukuk could eventually have. “Without a shadow of a doubt, the UK issuance will have the largest impact” of the various non-Muslim jurisdictions believed to be planning a sukuk, said Arsalaan Ahmed, head of capital financing at Barwa Bank. “The UK has shown all the areas that need to be looked at for a non-OIC sovereign issue, and when it is done, the UK will be a case study on how to do it.” He believes the “trickle down effect will be good for investors”, and notes that the fact that most Islamic cross-border contracts are structured under English law should work to the benefit of London as a financial centre.

But such is their tardiness, the UK may not yet meet Javid’s boast of being the first western sovereign to launch a sukuk. It looks increasingly likely that Luxembourg is going to beat them to it. Not that Javid seems bothered, turning the competition into positive spin with the skill of a politician. “I’m not concerned at all. I welcome it,” he said. “Where London leads, others follow.”