Taking the UK out of sukuk

Those in the Islamic finance community were eagerly awaiting the UK Pre-Budget Report (PBR) on October 9. In April, the government had said that the UK Treasury would conduct a feasibility report into issuing a sukuk and, all being well, would announce the details of the issue in the 2007 PBR.

When the report came and went without any mention of a sukuk issue, supporters of Islamic finance were disappointed. This would have been the first sukuk from a Western government obligor and would have shown that Islamic finance has secured a place in the world financial system, beyond the Gulf and Far East.

Undoubtedly there were as many political as fiscal reasons behind the proposal to borrow Islamically, but it would have created the momentum for other Western governments with an interest in Islamic finance - perhaps Germany - to follow suit, and would have helped to create a benchmark for UK private sector Islamic bond issues. If private sector companies in Europe begin to fund themselves Islamically, it will present a great opportunity for Shariah compliant investors from the Middle East, who are often over-exposed to dollar assets, to spread their risk.

There had been rumblings before the big non-event to hint that the UK sukuk programme had stalled - Ed Balls, one of the scheme's chief proponents, had left the Treasury, there had been some technical problems with new legislation, there were concerns that coupon rates would be too low to attract investors when compared to sukuk issues from the Gulf, and the credit crunch probably did nothing to help matters. The delay may be a signal that it is tricky to support Islamic finance in a complicated tax environment, but unfortunately most Western countries have just such a situation.

This need not be a terminal blow to the UK government sukuk. Balls' successor as Economic Secretary to the Treasury, Kitty Ussher, is said to be supportive of the idea, and it may gain fresh impetus when the borrowing climate becomes a little warmer.

However, there needs to be support for Islamic corporate finance from Western companies in order for the sector to grow. True, there have been one or two cases of Western companies financing themselves Islamically, but it has been suggested that this was done in at least one case because the borrower was finding it hard to secure financing from a conventional lender.

Islamic finance is growing rapidly in the Middle East, but it needs to be supported internationally and to become part of the global financial system. Conventional finance is still easier and cheaper to obtain in most countries. A sukuk issued by a Western government would have been - and could still be - a way to propel Islamic finance into the mainstream.

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