Britain first in west to issue Islamic bonds
By James Blitz and Gilian Tett
Published: April 23 2007 03:00 | Last updated: April 23 2007 03:00
Britain is to become the first western government to issue shariah-compliant bonds as it seeks to turn London into the world centre of Islamic finance and build bridges to the Muslim community.
The Treasury will announce today that it is paving the way for the launch of the first bonds no later than next year - and perhaps within the current financial year.
The move, to be unveiled by Ed Balls, the City minister, is unprecedented. Shariah-compliant bonds have previously been issued by the governments of Pakistan and Malaysia and also by corporate issuers around the world but never by a western nation.
The UK would aim not only to issue the new bonds on wholesale financial markets but also to use them as vehicles to allow Muslims in Britain to invest in National Savings products through banks and post offices.
Mr Balls believes that the launch of Islamic bonds by the government will help to underpin London's role as an international financial centre. The Treasury estimates that total Islamic finance assets worldwide, including private equity and bonds exceed $250bn (£124.7bn).
But Mr Balls also believes that today's move will send a powerful message to the Muslim community both in Britain and around the world that the UK authorities are intent on engaging with them in innovative ways.
Mr Balls held a meeting with leading Muslim figures in the UK, including the Muslim Council of Great Britain, last Monday.
He came away convinced of the strength of support for government action in this area.
A senior Treasury figure said last night: "We hope Muslim leaders will be impressed that we are now moving towards doing the technical work on this bond issue so quickly."
The Treasury has not yet worked out what the underlying structure of UK-issued Islamic bonds will be. However, Mr Balls is confident that the technical details can be worked out by the Debt Management Office and Treasury officials.
Issuing sukuk, or Islamic bonds that make regular payments to investors, is usually slightly more expensive than raising funds with western-style bonds, because these instruments require extensive, costly legal and religious advice. Moreover, the market is so young that activity is more fragmented and opaque than in other sectors of finance.
London is far ahead of rival western financial centres, such as New York, Tokyo or Frankfurt, in terms of its success in attracting Islamic financial business.
However, it faces growing competition from centres in the Islamic world, such as Riyadh, Bahrain, Dubai or Kuala Lumpur.
In an attempt to maintain an edge, the government has already taken a number of measures designed to promote the UK as a hospitable environment for Islamic finance.
They include measures that allow sukuk to be issued, held and traded in the same way as corporate bonds. The move is expected to increase primary issuance in the UK. There is also an increasingly lively secondary sukuk market.
The total size of the world sukuk bond market, including both sovereign and private issuers, is estimated at $4bn.
But the size of the government issue will not become clear until the pre-Budget report in November or possibly not until the Budget the following spring.
What is Islamic finance?
Muslims believe the Koran prohibits certain practices that are central to Western finance - the payment of interest (riba) or financial speculation (gharar.)
Until recently this made it impossible for devout Muslims to use most Western banking products. But over the past 40 years, the Islamic finance industry has become adept at creating financial structures that provide many of the benefits of Western financial products - but without riba or gharar.
Sukuk are often called Islamic bonds, because they make regular payments to investors that echo interest payments. Yet these are generated by a business activity owned by the issuer - not by interest earned on cash. Pakistan has issued a sukuk which uses toll receipts from state roads to pay investors holding this government bond.
Britain first in west to issue Islamic bonds
Author