LONDON,Britain took another step further toward the eventual issuance of its debut sovereign Sukuk (Islamic bond), when Chancellor of the Exchequer Alistair Darling announced in his Pre-Budget Report (PBR) on Wednesday that progress has been made in this respect and further announcements can be expected later this year and in spring 2008.
“The government remains of the view that there is real potential, not only for the City of London, but also for addressing wider issues of financial inclusion, in continuing to develop policy in this area. To that end, it will hold further detailed and specific consultation. The Treasury and the Debt Management Office will publish a consultation document later in the autumn. Following the consultation, the government will announce its decision and next steps including the timetable for any primary legislation,” the report said.
Last April, Ed Balls, the then economic secretary announced that the Treasury and the Debt Management Office was embarking on a feasibility study on the benefits and costs of the UK government issuing a sovereign Sukuk in the wholesale sterling market and the practical and legal implications of doing so. “We are determined to do everything we can to deliver greater opportunities for British Muslims — and also to entrench London as a leading center for Islamic finance in the world,” Balls said.
The pre-budget report confirmed that the feasibility study has identified several important structural issues that need to be resolved prior to any Sukuk issuance.
These include the need for primary legislation to facilitate Sukuk issuance, the identification of an assets to be transferred to a special purpose vehicle (on the assumption of an Ijarah (leasing structure) to facilitate Sukuk issuance, and the tax treatment of assets upon transfer to and from a special purpose vehicle and any other taxation or regulatory issues.
The chancellor also confirmed that National Savings & Investments (NS&I), the government savings scheme run by the Royal Mail, will be reporting in spring 2008 on the possibility of the government becoming an issuer of retail Islamic financial products including Sukuk.
The PBR also reported progress on the potential issuance of a sovereign Sukuk in the wholesale market.
The government has identified a number of potential benefits of Sukuk issuance flowing to the City of London and to the wider community.
The government has also identified a number of potential costs, including the costs of structuring and launching Sukuk issuance, and other costs that are dependent on the size and nature of the issuance.
The government is urgently examining the risks associated with Sukuk issuance, particularly the risks relating to price and demand.
In this context, the government is examining the feasibility of issuing Sukuk that would have similar characteristics to gilts or Treasury bills. The government is considering the features that a Sukuk would need in order to be issued at the same price as a gilt or Treasury bill. These are currently issued with the debt management policy objective of minimizing long-term cost, taking into account risk, the report said.
An estimated $30 billion of commodity Murabaha is structured through London each year mainly using contracts on the London Metals Exchange. The UK government believes that a Sukuk issuance “could further spur the development of the City as a center for Islamic finance, boosting its ability to attract further Sukuk structuring activity.”