DAVID CAMERON’s plan to issue a £200m sharia-compliant government bond (a sukuk) may spark a drastic rise in Islamic financial activity in the West, a leading analyst says.
“The lack of sharia-compliant debt instruments outside the Muslim world has acted like a funnel, creating a mismatch between supply and demand,” says Sayd Farook, Thomson Reuters’s global head of Islamic capital markets.
But challenges to the widespread adoption of Islamic finance remain. A panel of central bankers, under Farook’s moderation, will discuss how to further internationalise the sector at today’s Forum.
Germany’s state of Saxony-Anhalt issued €100m (£86m) in Islamic bonds in 2004. But the UK would be the first sovereign to tap directly into the growing pool of Islamic funds. And demand among investors will likely be high. “If £150bn of Islamic bonds were issued tomorrow, this would not be enough to meet demand among Islamic banks – not to mention non-bank investors,” says Farook. “The UK’s sukuk will also likely set a precedent for other Western governments, and could increase the chance of Europe and the US following suit.”
The implications may reach beyond sovereign debt. “By establishing a benchmark yield curve for Islamic debt products in pounds, the UK is making it easier for Western firms to issue sharia-compliant corporate bonds,” Farook says. Corporate debt is priced at a premium above gilt yields, and the UK sukuk may set a standard for firms to work from. This could broaden the appeal of such issuances outside the Islamic world.
Hamid Yunis of Taylor Wessing says the sukuk is exciting news for the UK infrastructure sector. “Some of the financing and contractual structures that underpin Islamic bonds will be similar in nature to existing project structures,” he says. And for Islamic investors, wider availability of sovereign and corporate bonds would allow greater diversification. “Typical non-Islamic portfolios have 30 per cent minimum allocation to bonds,” Farook says. If governments and firms eventually issue sukuk on a large scale, portfolios may shift from a focus on property and stock.