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Islamic Finance news Guide 2008
Page 10
Developments in Global Islamic Financial Markets in 2007 and
Prospects for 2008 (continued...)
as one of the factors that attracted Deutsche Bank, JPMorgan
Chase and BNP Paribas to come has been the potentially
attractive fees from Sukuk arrangement.
At present, HSBC Amanah and CIMB Islamic of Malaysia
are the dominant managers, but Deutsche Bank arranged
18 Sukuk in 2007, and JPMorgan Chase and BNP Paribas
— which arranged two and three respectively — are keen to
catch up. Standard Chartered is also a lead arranger, given its
worldwide network that includes Malaysia and South Asia, but
expect more Sukuk arrangements out of its offi ce in the Dubai
International Financial Center.
Proposed sterling sovereign Sukuk
A landmark development was the publication in November
2007 of the consultative document on sterling Sukuk
issuance by Her Majesty’s Treasury in the UK. London has
been the leading western center for Islamic banking since the
early 1980s, but there are no Shariah compliant transactions
in its debt markets.
Yet London’s position as the leading European market for
corporate bonds and fl oating rate notes demonstrates that
there is the expertise to develop new variants catering
specifi cally for the requirements of Islamic fi nancial
institutions. The consultative document seeks opinions on
whether Ijarah Sukuk based on rental contracts would be
the most appropriate form of Sukuk for the proposed UK
government issuance and what would be the legal rights for
the government as issuer, the Sukuk investors and the special
purpose vehicle established to administer the Sukuk.
The proposed Sukuk by HM Treasury is likely to be priced at
below LIBOR and in line with the pricing of other UK government
debt. As the UK government can easily raise fi nance at highly
competitive rates given its creditworthiness, it is not prepared
to pay a premium to Sukuk investors that would ultimately be
disadvantageous to British taxpayers. The purpose is not to
attract funding from Islamic fi nancial institutions in the Gulf,
although they are welcome to bid for the Sukuk, but rather
to provide a Shariah compliant alternative for those fi nancial
institutions that already hold UK government debt.
Major international banks involved in Islamic fi nance, for
example, may welcome the opportunity to acquire high-quality
marketable Shariah compliant assets as counterparts to their
Wakalah, Qard Hasan and Mudarabah deposit liabilities. This
includes sterling liabilities, as both Islamic and conventional
banks in the UK are offering Shariah compliant current,
savings and investment accounts, including time and advance
notice deposits.
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At present, covering liquidity requirements is problematic
and has a high opportunity cost if assets are held in cash
or in Murabahah inter-bank deposits that incur relatively high
structuring charges for very low returns.
The main motivation behind the UK government’s interest
in sovereign Sukuk is that such issuances will serve as a
pricing benchmark and facilitate the city of London emerging
as a major international center for corporate Sukuk, indeed
perhaps even the leading center. In addition to the investment
banking expertise in bond and note issuance in London, the
city has many advantages over other potentially competing
centers, notably the long-term historical links with the Muslim
world, a legal system based on common law that can ensure
the enforceability of Shariah compliant contracts and the
presence of fi nancial institutions and businesses from all
major Muslim countries.
“The main motivation behind
the UK government’s interest
in sovereign Sukuk is that such
issuances will serve as a pricing
benchmark and facilitate
the city of London emerging as
a major international center for
corporate Sukuk”
A further advantage is the strength of sterling, as Gulf
investors seek alternatives to the US dollar, the UK pound and
the euro being the obvious choices given their convertibility,
the extremely competitive spreads on foreign exchange
transactions and the choice of hedging opportunities. Sterling
may be less attractive from the issuers’ perspective, however,
given its strength, but this applies to an even greater extent to
the euro, and the likely lower pricing of sterling-denominated
corporate Sukuk should largely compensate for the risk to
dollar-dependent issuers of sterling appreciation. Of course,
if the other GCC countries follow Kuwait’s lead in May 2007
and move to a currency basket, expectations concerning
sterling appreciation against the US dollar will become less of
a concern for issuers.
The timing of any Sukuk issuance by the UK government
remains unclear, as there are legal and tax issues regarding
the underlying asset that could be used that may require
legislation. Selecting which Shariah scholars to approve the
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