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Cameron Announces U.K. Plans for Debut Issue of Islamic Gilts

U.K. Prime Minister David Cameron
David Cameron, U.K. prime minister. Photographer: Simon Dawson/Bloomberg

Prime Minister David Cameron said the U.K. plans to become the first country outside the Muslim world to sell a Shariah-compliant bond as soon as next year.

Cameron laid out his government’s intentions in a speech to the World Islamic Economic Forum in London. The Islamic bonds, known as sukuk, would be valued at about 200 million pounds ($320 million). Cameron also said London Stock Exchange Group Plc is creating an Islamic market index.

“For years people have been talking about creating an Islamic bond -- or sukuk -- outside the Islamic world, but it’s never quite happened,” the prime minister said. “Changing that is a question of pragmatism and political will. And here in Britain we have got both. This government wants Britain to become the first sovereign outside the Islamic world to issue an Islamic bond.”

The bond announcement is a reversal from the position that Robert Stheeman, chief executive officer of the U.K.’s Debt Management Office, set out in a Sept. 25 interview. Stheeman said then that offering sukuk was “not going to be value for money” and that something would need to change before Britain would shift its view.

“The government was previously looking at a relatively large program of sukuk issuance as part of its regular financing program, but this has now changed and the strategy is now to look at a more modest sukuk issue in order to derive wider benefits such as instigating activity in the Islamic finance industry,” Steve Whiting, a spokesman for the DMO, said in an e-mailed statement. “By restricting the supply the government also believes it may result in a lower yield than a larger program.”

Malaysian Dominance

Islamic bonds are typically backed by assets or cash flow because of the religion’s ban on interest. About 60 percent of the world’s sukuk is issued from Malaysia, according to Malaysia International Islamic Financial Centre.

The lack of highly rated sterling sukuk constrains Islamic lenders in the U.K. because the Bank of England requires them to hold easy-to-sell assets as protection against short-term funding shocks, according to ABC International Bank Plc and Bank of London & the Middle East, or BLME. Islamic finance should be as British as “fish and chips,” London’s lord mayor, Roger Gifford, said at a sukuk summit in June.

Islamic financial assets are growing 17 percent a year and are set to reach $2.67 trillion by 2017, up from $1.21 trillion now, PricewaterhouseCoopers LLP said in a July report.

Challenging Dubai

“Already London is the biggest center for Islamic finance outside the Islamic world,” Cameron said. “Today our ambition is to go further still. Because I don’t just want London to be a great capital of Islamic finance in the western world, I want London to stand alongside Dubai and Kuala Lumpur as one of the great capitals of Islamic finance anywhere in the world.”

The government established an Islamic financial task force in March to bring together policy makers and industry officials to review subjects ranging from banking regulation to standards for Islamic finance education.

Other than those of the Jeddah, Saudi Arabia-based Islamic Development Bank, top-ranked sukuk are sparse. Sovereign Islamic bond issuers include Qatar, which has the third-highest investment grade at Moody’s Investors Service and Standard & Poor’s. Britain had its top-notch credit score cut by one level at Moody’s and Fitch Ratings this year, while it retains a AAA rank at S&P.

Global Islamic bond sales declined this year after reaching a record $47 billion in 2012 as speculation the Federal Reserve will start tapering monetary stimulus pushed up borrowing costs. Sukuk sales have fallen 18 percent to $33 billion this year through Oct. 28, according to data compiled by Bloomberg.

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