Sukuk and the city

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WEALTH: A number of countries are lining up to compete to host new Islamic bond issues.

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BENCHMARKS: Professor Rifaat Abdel Karim, secretary general, IFSB.

In an exclusive report from the 2008 Sukuk Summit in London, Richard Agnew profiles the UK's capital's bid to become the Islamic finance capital of Europe.

The City of London has had a rough time recently, with markets being hit by the credit crunch and growing pessimism over the economy. But for the city's Islamic financiers, the outlook looks rosier.

At last month's Sukuk Summit in London, which focused on the nascent Islamic bond industry, headhunting firms were out in force and were offering top dollar to those with the right skills.

"A few people raised their eyebrows when I said I was studying Islamic finance," said one delegate. "But I definitely don't have any regrets."

With confidence high, it's not a surprise that the sector is keen to see movement on the UK government's planned launch of a multi-billion dollar Sukuk programme - an idea it has been considering since early last year, but is yet to move decisively on.

Sukuk - bonds that are structured to circumvent Sharia restrictions on the charging or payment of interest - have seen rapid uptake in recent years as more and more businesses and governments have used them to raise financing.

Much of this activity has taken place in the Gulf and South East Asia so far, and analysts believe a government issue could be the fillip the UK needs to cement its place as an Islamic finance centre in Europe.

Mindful of the benefits that would bring to financiers, frustration at the government's reluctance to make a concrete commitment was evident at the Summit.

In his speech, Darko Hajdukovic, international product manager at the London Stock Exchange (LSE), "strongly encouraged" the UK Treasury to press ahead with the issuance. He urged officials "not to lose track of time" while making their deliberations.

And speaking on the sidelines, one senior executive from a Middle East bank went further, accusing the government of "grandstanding" when it announced its intention to look into the idea in early 2007.

Michael Ainley, head of the Financial Services Authority's International Firm Department, which regulates the Islamic banking market in the UK, was forced to defend the perceived hold-up, saying it was necessary to work through all the legal ramifications before making a final decision.

"There has been a lengthy process of consultation, and I know there is some feeling that things should be moving faster," he said.

"However, it took us a couple of years of good natured and intense negotiations to get there when we were licensing our first Islamic bank. We do not want to get this wrong. Personally, I am very happy it is taking this length of time."

For the UK government and wider Sukuk industry, much is at stake. The market for Islamic bonds has not been immune to global economic difficulties in recent months, having reportedly experienced a slowdown in new issues this year.

But ratings agency Moody's predicts that it will expand by about 35% a year to be worth US$200bn by 2010, helped by new sales in countries like the UK.

Although the UK has already attracted several Sukuk issuances (the Central Bank of Bahrain launched its sovereign Sukuk in London in March, taking the total number of such bonds on the LSE to 18), analysts say a large show of support by the government would help it attract a bigger slice of this new business.

Observers also put forward further reasons for quick action. Governments, they point out, often support the development of new capital markets, such as Sukuk, by being the first to participate in them. By doing so, their issues provide secure assets that the private sector can turn to when structuring their own investments.

A sovereign issue could also potentially galvanise secondary trading in Islamic bonds and help create a wider range of financial services for the UK's estimated 1.4 million Muslim adults.

Theoretically, Sukuk have even been mooted as a fund-raising tool for infrastructure projects like the London Olympics in 2012 (although the Treasury denies that this has been considered).

Professor Rifaat Abdel Karim, secretary general of the Islamic Financial Services Board (IFSB), which sets worldwide Islamic banking standards, says "high-grade" sovereign issuances by the likes of the UK would create wider international acceptance of Islamic bonds: "These issues would provide institutions that offer Islamic financial services with good quality assets, which are critical for their investment and liquidity management operations.

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READERS' COMMENTS

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Posted by Osama, Amman, Jordan on Saturday 2 August 2008 at 12:28 UAE time

I wonder where I've heard this title before "... and the city"

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