Sunday, November 11, 2007

UK aims to become a center of Islamic Finance

Source: UK Treasury paves way for Islamic bonds

The UK government is in preparation to launch a series of sharia-compliant bonds, known as sukuk. Treasury minister Kitty Ussher plans a three-month consultation process, and might use next spring’s Budget to arrange for any legal changes that might be necessary in preparation for the first western government sukuk. Ms. Ussher believes that this plan will establish London as “a global gateway to Islamic finance,” assisting British Muslims in their search for sharia-compliant retail products, such as mortgages. Additionally, these bonds could be used as vehicles for British Muslims to invest in National Savings products through banks and post offices.
Despite speculation that the government might back away from the project after the departure of Ed Balls, former City minister and initiator of the scheme, Ms. Ussher will inform a high-level group of City executives this Wednesday (November 14, 2007) of her steadfast commitment to the project. In an interview with the Financial Times, Ms. Ussher responded to doubts whether the project will attract investors. “There is no question of delay at all. If anything there is greater demand. We have been doing an enormous amount of work.”
Unlike conventional bonds, sukuk function like Islamic “investment certificates” representing ownership in the underlying asset. This is because Sharia religious law forbids the collection of profits from interest. Rather, returns are paid in proportion to an investors ownership rights to the underlying asset. The sukuk market has experienced significant growth in the last five years, with nearly $40 billion (£ 19.1bn) issues this year alone, as compared to virtually nothing in 2001.
Many details of the project remain unsettled, including the structure of the sukuk. In addition, the competition for business is fierce, as the Middle East is gaining popularity as an attractive location to set up operations due to its oil wealth. Nonetheless, commitment to the project remains strong, and a successful execution of British sharia-compliant bonds could encourage large UK and western companies to launch similar securities in London, effectively boosting the capital as a center of Islamic finance.

Questions for Discussion
1. Are concerns about investor interest in the sharia-compliant bonds well placed?

No comments: