LONDON, Nov 10: Britain is gearing up to launch the first Islamic bond by a western government in spite of the collapse of the market in the past month.
According to Financial Times’ on-line edition on Sunday the Treasury has said there is a “powerful momentum” behind the plans, which will cement London’s position as the leading western centre for Islamic finance.
Islamic bonds or sukuk have been hit by the sharp fall in the price of oil and deepening gloom over the outlook for the world economy.
Hedge funds, which pumped money into Islamic products in the Middle East in the first six months of the year because of expectations over revaluations of some of the Gulf currencies against the dollar, have also exited the market.
There have been only three Islamic bond deals since the start of October, raising a meagre $214m (£137m), a quarter of the amount issued in September and a fraction of the $13.2bn raised in total this year so far, according to Dealogic, the data provider.
The government unveiled plans to issue a Sharia-compliant bond to much fanfare in April 2007.
Since then, the issue has been hotly debated with some civil servants raising concerns over the costs of issuing sukuk, which are far higher than for conventional bonds because of complexities in the way they are structured to pay profits or rent from an underlying business or asset, usually a building.
Ministers remain convinced the political and financial benefits outweigh worries about cost, according to government officials and bankers.
They also believe the bonds can be priced competitively to attract buyers, another concern of some civil servants.
Islamic bonds were one of the fastest growing instruments in the world before the credit crisis hit in August last year, although it is still a small market compared with conventional bonds.
Mohammed Dawood, director of capital markets at HSBC Amanah, the Islamic arm of HSBC, said: “We live in a global world and the consequent implications of a reduction of liquidity have had its impact on the sukuk market and the Middle East region.”
Muslim money-raising system grows in popularity.
An increasing number and variety of companies are using Islamic finance to raise money for expansion, research and product development, adds David Oakley.
They range from steel manufacturers to garden centres and luxury gift companies, which are often owned by or have Muslim shareholders.
These companies want to operate in a Sharia-compliant way that enables them to avoid paying interest, which is banned under Islamic law.
Thamesteel, a Kent-based steel manufacturer and part of the Saudi Arabian Al Tuwairqi group, used Islamic finance to buy scrap metal.
The Bank of London and the Middle East, the UK’s biggest Islamic bank, bought the materials on the steelmaker’s behalf and then sold them on at a higher price. This involved no interest payments.
The Peterborough Garden Park, a gardening company, is also using Islamic finance to develop one of its garden centres. The company was attracted by the competitive financing on offer rather than for religious reasons.
Edible Arrangements International, a luxury gift company based in the US, also turned to the BLME to help it raise money for expansion.
The company, which delivers fruit arrangements to customers in the US, has a Muslim owner who wanted to stick to principles of Sharia.