Tim Evershed

December 10, 2014: There must be more sovereign sukuk issued by non-Muslim countries after the success of previous bond launches, delegates were told at International Finance Magazine’s EU Islamic Finance and Banking Summit in London on November 18-19.

Recent years have seen successful issue of sovereign sukuks from the non-Muslim governments of the UK, Luxembourg, South Africa and Hong Kong.

This year has been a landmark one in Europe for sovereign sukuk with the UK and Luxembourg governments breaking new ground. The UK’s issue was for £200mn and attracted orders of over £2bn from investors. It will pay out profits based on the rental income from three government-owned properties in lieu of interest.

Meanwhile, the Grand Duchy issued the first sovereign sukuk in Euros from a national government. It was €200mn and it was two and a half times over-subscribed.

Marco Lichtfous, Partner, Deloitte, said: “So far we have concentrated on the corporate side and the wholesale side. There’s a need for sovereign paper so the issue that has taken place can’t be a one-off and it can’t be the end of it. For Luxembourg, the programme is ongoing and it is more a matter of finding the right need for and the right opportunity rather than just shuffling money around. We want to use it to help the economy grow.”

It has taken a long time for national governments to catch up with the sovereign sukuk issued by the German Federal State of Saxony-Anhalt in July 2004. It was a €100mn issue, which matured in July 2009, had tenure of five years with the rate of return linked to the six-month Euribor and paying a margin of 100 basis points over the benchmark.

However, Richard de Belder, Partner at law firm Dentons, says that the UK’s first issue has changed the paradigm for sovereign sukuk in Europe. He said: “There has been a big shift in the issue of sovereign-issued sukuk. The UK’s commitment has been going on for quite a while, but it is just one part of a bigger picture.

“Vital impetus came from Eddie George, the ex-governor of the Bank of England, who had been shocked to find out that his Muslim neighbours could not find a sharia compliant mortgage. George’s view was that it was wrong that any UK citizen should have been excluded from being able to access such finance.

“There were tax and regulatory barriers to overcome. Regulatory changes have been made to create a level playing field. The aim is not to put Islamic finance ahead of other finance but to treat it equally. And changes to tax rules have eliminated double tax charges.”

“The UK government did not need to issue a sukuk in order to fund itself because the gilt markets provide more than enough. It did it because the Islamic finance industry had liquidity requirements.

“Issuing that sukuk sent out a message, and an important message too, that the UK is open to Islamic finance. And it also wants to see more corporate sukuk being issued.”

According to de Belder, the next UK sovereign sukuk is a work in progress and will most likely be aimed at an infrastructure project, such as social housing, possibly in conjunction with a local authority. Other opportunities being considered include projects that include export finance, student loans or takaful insurance.

The attractiveness of sovereign sukuk was again underlined on the first day of the conference when Turkey borrowed $1bn through its 10-year dollar-denominated sukuk issue.

Muammar Cakir, Head of Derivatives Market at Borsa Istanbul, told delegates: “It was a successful launch and we are very happy and excited. We believe it will encourage the corporate sector. It is a defining moment for the sukuk market.”

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