The UK’s maiden sovereign sukuk issue was announced with considerable fanfare in October, and appears to be making progress. But the UK Treasury is not in a rush, and market participants are beginning to wonder why there is a delay.
Speaking at the Euromoney Islamic finance forum in London in February, Sajid Javid, MP, the 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 in the "next financial year" – that is, no earlier than April 5, and potentially not even this year.
Naturally, a sovereign has to be fairly studious and open in its appointment of advisers, and after review settled on HSBC and Linklaters. But with that done, why the sluggish pace?
Cautious approach
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."
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| Sajid Javid, MP, the financial secretary to the Treasury and a former Chase Manhattan and Deutsche Bank executive |
Asked why it is still not under way, 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 programme, 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 some sense, since the £200 million ($334 million) issue, when it comes, will not make the slightest difference to the UK’s national coffers compared with 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.
There is an alternative view, muttered by bankers and lawyers. Just because the UK doesn’t need sukuk for its funding doesn’t mean it shouldn’t continue to build a curve, they say, and it seems a waste of effort and research to put all this preparation into a one-off.
After all, the hope is that a UK sovereign issue will prompt other UK enterprises to launch sukuk, priced off whatever level the sovereign 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.
Back-chat
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 Irfan, managing director of the European Islamic Investment Bank, at the same Islamic conference. Irfan asked: "Why 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 he 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 [Organization of Islamic Cooperation] 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 the tardiness, the UK might not yet meet Javid’s boast of being the first western sovereign to launch a sukuk. It is starting to look likely that Luxembourg will beat the UK to it.
Not that Javid seems bothered; with all the skill of a politician he gives the competition a positive spin. "I’m not concerned at all. I welcome it," he said. "Where London leads, others follow."
