Sukuk issue aims to make UK 'Mecca for Middle East wealth'
PM says Islamic index and £200m Islamic bond issue will make City world centre for Islamic finance
DAVID CAMERON wants to make London a "Mecca for Middle East wealth" by introducing an Islamic index on the London Stock Exchange and issuing Islamic bonds, The Independent says. The moves are part of a drive to establish the City as one of the world's leading centres of Islamic finance, says the Daily Mail.
Why is the government wooing Islamic investment?
Because it's a growing market. The global market in Islamic investments, or sukuks, has grown by 150 per cent since 2006, the Mail says. The investments are tipped to be worth £1.3 trillion next year as "oil-rich states fund major building projects".
How will the new Islamic index work?
The index will "identify companies which are filtered according to Islamic [finance] principles," explains Reuters. As a result, it will be easier for Islamic investors to identify appropriate opportunities. The principles include bans on investing in alcohol, tobacco and gambling, for example. Islamic investments have already been used to finance London landmarks such as the Shard skyscraper and the Olympic Village.
What exactly is a sukuk?
Sukuks are investment certificates which generate a return to investors without breaking Islamic laws that prohibit people paying or collecting interest, the Mail says. The essential difference between a sukuk and a conventional investment bond is that each sukuk represents a share of ownership of the asset you are investing in, while regular bonds represent a share of debt. The other difference is that bond holders receive regularly scheduled payments for the life of the bond - often at a fixed rate - and they are not affected by costs related to the asset. Sukuk holders receive a share of the profit and accept a share of any loss incurred.
Is this the first time the UK has considered issuing sukuks?
No, it isn't. An issue was planned for 2007, but didn't go ahead "because the global financial crisis pulled the rug from under the market for new issuance," the Financial Times says. "The plan was eventually abandoned in 2011."
How many sukuks will the UK issue?
The Treasury will launch £200m worth of Islamic bonds as early as next year. The relatively small size of the issue suggests the government is "more interested in making a political point than raising money", writes Bloomberg's Leonid Bershidsk. It's a suggestion echoed by Jonathan Guthrie of the Financial Times who describes the £200m issue as "no more than an amuse bouche to Muslim sovereign wealth funds with appetites measured in billions".
Guthrie says the UK's sukuk issue will have "symbolic utility", however. It will demonstrate that the UK is "comfortable with financial products that circumvent usury, as well as the kind underpinned by it". The fact that a taxpayer-guaranteed Islamic bond will irritate the English Defence League is just the "pistachio topping on this particular slice of halva", writes Guthrie. ·