With the UK’s first sovereign sukuk poised for 2014, Badlisyah Abdul Ghani, CIMB Islamic's chief executive, reckons many British corporates are ready to follow suit. “A lot of UK-based corporates are primed to access the sukuk market as well, but they are obviously waiting for the benchmark to be set,” says Ghani.
“Tesco, for example, which has already issued in Malaysia, would be well placed to issue out of London as well. People in the company already have the expertise because of the previous issue. It would be very easy for them to access the sukuk market out of the UK,” he says.
The supermarket chain issued a sukuk worth RM700 million ($221 million) out of Malaysia in 2008 to fund domestic operations in the country and to refinance Tesco Malaysia's bank borrowings. Standard Chartered Bank Malaysia Berhad and CIMB Investment Bank Berhad were the bookrunners on the deal.
British retailer Marks and Spencer and food manufacturer and distributer Cargill could also follow, says Ghani.
“CIMB, which has had a presence in London for many years, could also issue out of the City, if the opportunity arises,” he continues.
The UK’s inaugural sukuk has been set initially at $200 million. It will make the UK the first sovereign to issue an Islamic bond outside the Islamic world. Under Shariah law, the bond will pay no interest but offer a share of the profit from the underlying asset instead.
The issue will act as a liquidity management tool for Britain’s Islamic lenders, but is mainly designed to boost London’s status as an Islamic finance hub. Britain currently has 22 financial institutions – including five fully Shariah-compliant banks – offering Islamic finance products. Britain has more Shariah-compliant banks than any other west European country.
A much larger issue of around five times the size had initially been planned, but was halted after the global financial turndown.
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| Badlisyah Abdul Ghani, CIMB Islamic's chief executive |
“Everyone needs to start somewhere. The issuer [the UK] needs to decide what size makes sense to them. And there is still a chance that the issue can be upsized. This is what happened in Malaysia,” says Ghani. “In fact, size is irrelevant. The most important thing for the UK is to get the ball rolling, and then other, larger issues can follow.” Malaysia tops the rankings for global sukuk issuance, which totalled over $148 billion in June, representing 60.4% of the total global sukuk market. The market has grown rapidly since 2001 when issuance totalled just $1.5 billion.
In 2002, Kumpulan Guthrie Berhad, an investment holding company that mainly dealt with plantations and has since been acquired by Sime Darby Berhad, issued the first global corporate bond out of Malaysia for $150 million. Now Malaysia dominates corporate sukuk, accounting for 78% of the global market in 2012, with a value of $19 billion.
Over the last three days and in an effort to illustrate the City’s capability as an Islamic finance hub, London has been host to the ninth World Economic Islamic Forum, the fist to be held in a non-Muslim country.
“There are 56 Islamic countries in the world. But the forum talks about facilitating economic interaction between all countries, not just Islamic ones – this is one of the main objectives of the forum. Holding the forum in the UK serves this purpose,” says Ghani.
Attracting investment
The development of Islamic finance in London is also seen as another step to attract the growing wealth of Middle Eastern countries. Recently, large projects in the UK, including the Olympic village and the Shard, have been backed by money from the Middle East. Gulf investors also own stakes in high-profile assets such as high-end retailer Harrods and, further afield, Manchester City football club.
“I would assume that naturally investors from the Middle East will be some of the first to take up the issue out of London,” says Ghani. “But if not, the exiting market will absorb the issue. At the moment there is so much money out there on the search for good quality assets, which are hard to find.”
More importantly, says Ghani, London cannot rest on its reputation as a first-class credit. “Because London is a new issuer in the market, it might be forced to pay a higher price for the issue. They haven’t yet made a name for themselves in the market. In this case, the sukuk should be offered to new and traditional investors to create the right price tension.”
At most London should pay the same as its conventional issues. “If it can’t get this price, there is no real point issuing – unless the priority is to get a new investor base over pricing, of course, but this can only be a short-term strategy. Eventually – if the sukuk has been successful – new investors will come any way,” continues Ghani.
Challenges ahead
Daud Vicary Abdullah, president and chief executive of the International Centre for Education in Islamic Finance, says: “The announcement of the sukuk and the fact that London is holding the forum this year show that the government has real political will for the City to become an Islamic finance hub. But challenges still remain.”
A lack of education in the sector is one drawback. “The UK does provide courses in Islamic finance, but there is not enough strength and depth,” says Abdullah.
“There needs to be greater development and delivery of executive programmes in Islamic finance within the City itself, further developments in tertiary education, as well as education among the general population,” says Abdullah.
But most importantly, the Bank of England should consider joining the Islamic Financial Services Board, says Abdullah. “If the UK becomes part of this standard-setting body, it would send a much clearer message, globally, of the UK’s ambitions, as well as being able to closely access what is happening on a government-to-government level. Without joining, it wouldn’t have much meaningful existence in Islamic finance.” On Tuesday the British Bankers Association called on the Bank of England to accept non-interest bearing deposits from Islamic lenders for liquidity management purposes.
The potential for Islamic finance is huge. The sector is growing 50% faster than traditional banking. Moreover, while a quarter of the world’s population is Muslim, only 1% of the world’s financial assets are Shariah-compliant.
According to consulting firm EY, the global Islamic banking industry is expected to reach $1.8 trillion by the end of this year, while PricewaterhouseCoopers predicts the Islamic finance industry will double to $2.67 trillion in assets by 2017.