Britain attracted £2.3 billion ($3.9 bn) in orders when it became the first western country to issue an sharia-compliant bond, that obeys Islamic religious rules. The £200 million ($340m) 5-year Islamic finance bond does not pay interest but instead shares profits based on rental income from three properties owned by Her Majesty’s Government. The return is 2.036%, the same as the yield on UK 5-year Government bond or gilt.
The bond was marketed by HSBC, Malaysia’s CIMB, Qatar’s Barwa, National Bank of Abu Dhabi and Standard Chartered Bank. HSBC said that more than a third of the issuance went to UK investors.
A story in the Financial Times says London is aiming for a place as a global centre for Islamic finance. The bond attracted orders from investors in UK, Middle East and Asia for more than 10 times the amount sold. It was launched a few days before Ramadan. According to Dealogic, so far this year global sukuk issuance has totaled $21bn. The UK bond is considered high-grade debt.
George Osborne, the Chancellor, was reported as saying the sukuk is part of a long-term economic plan to make Britain the centre of the global financial system. “We have seen very strong demand for the sukuk, resulting in a price that delivers good value for money for the taxpayer.”
The FT reported Farmida Bi, European head of Islamic finance for law firm Norton Rose Fulbright, saying: “The UK government bond will be particular attractive to Islamic banks because they need to hold highly rated paper to meet the requirements of Basel III.” There have only been 4 Islamic bonds rated AAA since the start of 2013, of which 3 were issued by Islamic development bank in Saudi Arabia and one for public-sector finance in Malaysia.
Several African countries including South Africa have expressed strong interest in introducing sharia-compliant bonds and have altered tax and other rules to allow this.
Osborne hopes this will pave the way for future corporate issues. In 2007 British grocer Tesco issued a sukuk through its Malaysian arm and in 2009 online grocer Ocado borrowed £10m in a sharia-compliant loan. Only one domestic manufacturer, International Innovative Technologies in northern Yorkshire, has borrowed money in UK through a sharia-compliant bond.