The UK's trailblazing sukuk developed an innovative
structure, setting a benchmark that is hoped will inspire the
country's corporates to tap the lucrative shariah market.
could be a game-changer for London’s bid to
become an Islamic finance hub
Issued on June 25,
the £200 million ($343 million) bond attracted orders of
more than £2 billion.
The transaction is the first sukuk to be issued by
a non-Muslim country. It has been hailed as a landmark in the
UK's strategy to bolster its appeal as a global hub for
But leading lawyers believe the onus is now on the industry
to take the lead and make Islamic finance a viable option in
the competitive UK market.
"Delivering on past expectations, this sukuk is a
significant statement of support by the government for the UK
as the most important centre for Islamic finance outside the
Muslim world," said Neil Miller, Linklaters' global head of
Islamic finance who led the team advising the government on the
"The government has proven that the concept works, now the
industry needs to work out how it can now bring this type of
financing into the UK," he continued, saying that it's a
"You've got to find corporates that are interested, but the
industry has also got to compete with all of the other avenues
of financing that are available to western corporates."
The deal is a sukuk al-ijara, a shariah-compliant
leasing structure, which allows the rental income of three
central UK government offices to underpin the transaction.
Miller said there were three reasons for choosing the
sukuk al-ijara structure. Primarily, it is what's
known in the industry as a vanilla structure.
"It's one of the simpler Islamic finance structures that's
easier to understand," he said. "It was important that we could
structure an instrument that wasn't going to be overly
complicated as the first issuance by the government."
Ijara is also the favoured form of sukuk
used for other government issuances in the Muslim world.
UK tax rules were another reason driving the structuring
decisions. Since 2003, the framework has been subject to a
series of revisions aimed at creating a level playing field for
Islamic finance in the UK. "We wanted to make sure that we
fitted within the tax regime that has been set up for precisely
this sort of structure," said Miller.
But Norton Rose Fulbright's Farmida Bi believes that
ultimately the UK's nascent shariah finance market will need to
issue more diverse structures that combine physical assets with
"We will need more hybrid structures where, for example, you
have a partial ijara with a partial wakala,"
she said. "It's not always easy to find unencumbered assets to
put into ijara structures."
"Some of the hybrid structures that are being used in other
jurisdictions are likely to be attractive in the future," Bi
continued. "There's nothing in the regulatory framework that
would stop those being used by UK entities."
- The UK has become the first non-Muslim country to
issue a sovereign sukuk;
- The benchmark deal was issued on the basis of a
sukuk al-ijara structure;
- The documentation included innovative features to
ensurethe UK Treasury achieved its objective of issuing a
- The Islamic finance industry now needs to work
out how it can now bring this type of financing into the UK,
a leading lawyer has said.
A gilt-like sukuk
The sukuk documentation included a number of
innovative features to ensure that the Treasury achieved its
objective of issuing a gilt-like instrument, while remaining
shariah-compliant and falling within the UK's alternative
finance arrangements legislation.
In the Treasury's last bond which was issued more than ten
years ago, the noteholders were represented by a trustee, or a
representative acting in a fiduciary capacity on behalf of
However, there is no such entity in a gilt.
"There has, to our knowledge, never been an international
sukuk adopting an analogous approach to a UK gilt
whereby there is no fiduciary acting on behalf of the holders,"
said Richard O'Callaghan, a capital markets partner with
Linklaters. "For the first time ever in the international
sukuk context, we have stripped out the delegate."
He continued: "This means that we have directly enforceable
rights against the Treasury under the procurement undertaking
in circumstances analogous to those under the gilt and
different to those under the last eurobond that the UK
|Islamic finance in the UK
- In 2008, the UK government announced it would
issue a shariah-compliant sukuk. This was postponed
on the onset of the global financial crisis.
- The UK has five domestically regulated Islamic
investment banks and one retail bank. Islamic banks
have also set up businesses in the UK, such as Qatar
Islamic Bank’s QIB (UK), Kuwait
Securities House’s Gatehouse Bank and
Boubyan Bank’s BLME.
- In recent years, both shariah-compliant and
conventional investors from the Gulf have been active
in the UK. Investment in London from Qatar, Malaysia,
Brunei and Kuwait shows that Islamic finance could be
a key driver for investment.
- Qatar's investments in UK infrastructure, real
estate, and financial institutions have topped $16
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