London plans for Islamic bond issue

Citation

(2008), "London plans for Islamic bond issue", International Journal of Islamic and Middle Eastern Finance and Management, Vol. 1 No. 1. https://doi.org/10.1108/imefm.2008.35201aab.001

London plans for Islamic bond issue

Article Type: News From: International Journal of Islamic and Middle Eastern Finance and Management, Volume 1, Issue 1.

London plans for Islamic bond issue

The UK Treasury has confirmed that plans are afoot for the first issue of Islamic bonds (Sukuks) by a Western Government. Observers have expressed the view that the move comes as another sign of the heating competition between London and New York as major international financial centres.

In November 2007, the UK Treasury issued a discussion document, so as to start off the consultation process leading towards the issue of the novel paper, probably during the first part of 2008. When issued, the UK-Government sukuks will be the fourth sovereign bond of this type on the world stage.

The basic idea is that certain assets (e.g. buildings) would be earmarked for the bond issue, whereby the government would pay rental for utilising the assts, and this rental would be passed on to the sukuk-holders in the form of dividends, avoiding thereby any payment of fixed and pre-set level of interest.

The plan involves selling the new bonds via high street-banking branches and the State-owned National Savings Bank. It is understood that new legislation will need to go the UK houses of parliament, in order to pave the way for the issue. Yet, doubts have been expressed over the likely level of interest by investors in the bond issue, despite the popularity of this Islamic instrument in recent years.

It is arguable whether this decision by the UK Government is related in any way to its strategy to enhance links and understanding with Muslim communities, both within the UK and overseas. Notwithstanding this, London has in recent years proved to be a leader within the area of Islamic finance and investment. On the retail front, Islamic mortgages are now available at major British banks, including HSBC and Lloyds TSB.

Also, Britain has four Islamic banks, licensed by the Financial Services Authority, while none exist in US or the rest of Europe. In late 2007, a total of some $8bn Sharia-compliant bonds were registered for trading on the London Stock Exchange. The UK Government and the London-based Financial Services Authority have recently introduced reforms that open the path for a rage of Islamic products, including car loans and mortgages.

Issued sukuks at record level

The total value of issued sukuks (Islamic bonds) is likely to have registered a new record in 2007. This total has been advancing rapidly over the period 2001-2007, according to the Islamic Finance Information Service.

While the total value of sukuks issued did not exceed some $500m in 2001, the corresponding figure for 2007 surpassed the £40bn mark, giving an average annual increase of around 108 per cent over the period.

It is noteworthy that the value of sukuks issued by corporations now far outweighs those of their sovereign counterparts. By the end of 2007, the value of corporate sukuks represented over 80 per cent of the overall total, while back in 2001 virtually all sukuks on the market had emanated from governments or their agencies.

Standard Chartered expands in Islamic banking

The Standard Chartered (StanChart) bank announced plans for a major expansion in the area of Islamic banking products. The UK-based group, which specialises in emerging markets, seems to be targeting India an African nations in its new expansion drive.

The bank seems particularly focused on increasing its range of Islamic capital-market products, such as hedging solutions and treasury risk-management instruments. At present, StanChart offers current accounts and other Sharia-compliant products in several markets, including Pakistan, UAE and Bangladesh. Also, the wholesale arm of StanChart is active in arranging and managing the issue of sukuks (Islamic bonds).

Micro-finance sector shows steady growth

JP Morgan has become one of the latest major banking groups to set up a micro-finance unit. Steady growth of the industry, coupled with high profitability of many micro-finance institutions, have made an enormous impact on investors. Until a few years ago, the sector had largely been the preserve of non-profit organisations or government agencies.

JP Morgan's latest move is symptomatic of the high rate of growth recorded by micro-finance among developing nations. Estimates put the total value of loans by micro-finance organisations at more than $23bn by the end of 2006, while the number of borrowers exceeded 52 million at that date. These figures are taken from the Washington-based Microfinance Information Exchange.

However, JP Morgan estimates that the potential demand for “sustainable” financial services among low-income nations is as high as $300bn. According to the merchant bank's social sector finance unit, the bank is keen to make a social impact, and “we believe microfinance is an effective tool to do so ... this is a business opportunity that we think will grow over time.”

It is noteworthy that the microfinance sector has already attracted major names in the world of banking. These include Morgan Stanley, HSBC, and Deutsche Bank.