Prime Minister David Cameron is looking to Southeast Asia to boost the UK’s role in Islamic finance. It’s the Bank of England he needs to convince first, say Shariah-compliant lenders based in Britain.
Central bank rules require lenders to hold easy-to-sell assets as protection against short-term funding shocks. Most are off-limits for Islamic banks because they pay interest.
Islamic lenders are "disadvantaged," Sultan Choudhury, managing director of Islamic Bank of Britain, said in a phone interview from Birmingham, England, on April 22. "We want the ability to operate without the restrictions that we are facing. The biggest example of that is in the liquidity rules."
Cameron visited Malaysia, the biggest center for the more than US$1 trillion-a-year market, last year to build on a pact to promote bilateral engagement in the industry and created an Islamic Finance Task Force in March. Britain’s six Shariah-compliant lenders will struggle to grow unless regulators adapt bank liquidity rules or highly rated borrowers issue sukuk in pounds, according to Choudhury and Bank of London & the Middle East’s Nigel Denison.
"For an Islamic bank, there is a lack of liquid assets available," Denison, the London-based lender’s head of markets, said by phone. "If there were a liquid sukuk, particularly in sterling -- because we report in sterling -- that would make our lives a lot easier."
The UK announced plans five years ago to become the first western government to issue sukuk, only to disband the initiative in 2011 when the Debt Management Office said they don’t "provide value for money."
The average yield on Shariah-compliant debt has climbed 16 basis points this year to 2.8 per cent on April 24, according to the HSBC/Nasdaq Dubai US Dollar Sukuk Index. The yield on 10-year gilts fell 14 basis points to 1.69 per cent, data compiled by Bloomberg show.
"The cost of funding via conventional sovereign bonds -- gilts -- is still more advantageous than the cost of funding via sukuk," Haissam Saleh, Qatar Islamic Bank UK Plc’s London-based head of Middle East and North Africa treasury structuring and sales, said by e-mail April 17.
A Treasury spokesman said March 11 there are no immediate plans to issue sukuk. The press service didn’t respond last week to requests for comment.
"The UK’s liquidity regime applies to all firms equally," Liam Parker, a spokesman for the Bank of England, said in an e-mailed response April 24. "An allowance is made for Shariah-compliant firms with regard to the instruments they are required to hold to meet their liquidity requirements, but not to the quantity of liquidity."
The overhaul of bank rules known as Basel III may take account of Shariah lenders in the European Union, Parker said.
"The UK is actively engaged with international regulatory counterparts both in Basel and within the EU on this issue," Parker said. "We would expect that EU implementation will make suitable allowance for Shariah-compliant firms."
The only sukuk currently meeting Bank of England criteria are dollar notes from Islamic Development Bank, a Saudi-based multilateral lender, according to Choudhury and Denison. The bonds rank AAA at Fitch Ratings, one above the UK.
The lender may issue sukuk in pounds, Wayne Evans, an adviser to TheCityUK, a group representing financial services companies, said by phone April 2. IDB "is not yet in a position" to comment, Abdul Aziz Al Hinai, vice president for finance, said by e-mail April 22.
Global Islamic debt sales jumped to US$7.23 billion in March, the third-highest monthly total, data compiled by Bloomberg show. The debt avoids interest through contracts such as Murabahah, where lenders own an asset and sell it back at a mark-up.
Borrowers are put off selling sukuk in the UK in part because the holder would be liable for value added tax, Gary Campbell, a partner at Deloitte LLP in London, said by phone March 25. The underlying assets would need to be based outside of the UK for exemption, he said.
"We understand that the UK government is very sympathetic and is keen to eliminate any kind of discrepancies," Campbell said. "Whilst they are sympathetic, they haven’t issued anything formally in writing on the VAT treatment of sukuk."
Only one Shariah-compliant lender has set up in the UK in the past five years -- Abu Dhabi Islamic Bank PJSC, according to TheCityUK. HSBC Holdings Plc stopped offering Shariah-compliant services in the UK last year.
The Islamic Finance Task Force will look at ways to encourage sukuk, Richard Thomas, a member of the working group and chief executive officer at Gatehouse Bank Plc, said in a March 14 interview from Dubai.
"We need to have appropriate liquidity instruments," Mansur Mannan, executive director of DAR Capital, a London-based financial adviser, said in a phone interview March 21. "If regulations can be changed somewhat, that would be a step in the right direction.
(Business Times / 30 April 2013)
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Alfalah Consulting - Kuala Lumpur: www.alfalahconsulting.com
Islamic Investment Malaysia: www.islamic-invest-malaysia.com
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