International volume of sukuk issuance, and the resultant support given to growth of the Islamic capital market from and within Europe, continues to receive high-profile coverage within the international financial press. Sukuk issuance by European sovereigns has been eagerly anticipated for years, with much accompanying commentary as to which country would prevail in the “race” to be first and what implications, if any, would there be for other jurisdictions following behind.
Of course we now know that the UK government is first and its inaugural GBP 200 million Ijara-based sukuk closed with a confirmed order book over 10 times the size of the issue. Subject to approval of a revised bill by its Council of State, Luxembourg plans to follow with a euro-denominated sukuk before the end of the year.
Debate is already centered on whether these will be single sovereign issues or part of a regular, recurrent program. Clearly the appetite for the UK’s paper, and the fact that pricing is consistent with that of parallel gilts demonstrating value for money, will cause the UK government to reflect.
Commercial considerations aside, the UK has six Shariah-compliant banks authorized for business by its financial regulator. Although it is to be hoped that the UK Islamic banks will benefit from any allocation of this sukuk, they still have very limited access to high quality, liquid assets that Basel III stipulates should form part of the core liquidity buffer of every bank.
If the British banks are to continue developing their businesses to maximum potential – building their balance sheets in the process – their recurrent access to sufficient supply of Shariah-compliant, AAA-rated liquid assets will remain a priority, and more so if other Islamic banks receive authorization in the UK in future.
Other than supporting regulatory requirement, the precedent that the sovereign issue has established is of key industry importance. For 15 years, the UK government, supported by private sector endeavor, has sought to legislate and level the playing field to enable the domestic provision of Islamic financial services; to allow alternative, financial products and solutions to be delivered to support inbound investors’ objectives and to enhance the outbound reach of UK financial sector expertise.
Although not alone in Europe in providing an enabling architecture for the Islamic capital market, the UK has now shown proof of concept and successfully completed another stage of a continuing program of work. An ongoing industry dialogue with government has supported the milestones reached to date and practitioners acknowledge their corporate responsibility to promote the local market building process moving forward.
Following the issuance of the inaugural sovereign sukuk, anticipation is that others will be encouraged to access the UK’s Shariah-compliant financial infrastructure, be it through issuance of sukuk by European corporates or as the basis for innovating capital market product for the UK’s inward investment flows.
Competitive spirit will always remain between countries, but recent developments should enhance cross-border connections between Europe and the international Islamic capital market, adding value to the global development strategies of our industry leadership across its various centers of excellence.