reflections on UK sovereign sukuk

The first United Kingdom sovereign sukuk issue at June’s end was ten times oversubscribed. Investors based in Britain accounted for one-third of purchasers with the remainder from Asia and the Middle East. Relying upon a widely accepted, well-established type of Islamic contract (ijarah) this issuance revealed investor receptivity (in a post-crisis world) to what is at least in this jurisdiction a novel form of portfolio diversification; and a financing structure which also adhered to the comparatively conservative ethos of Islamic finance: the sharing of risk, and of profit and loss, backed by real economic assets.

Even as demand exceeded supply, this experimental effort (which the government currently states will not be repeated) revealed one of the challenges facing Islamic finance on a global scale: the challenge of finding suitable tangible assets upon which shari’ah compliant securities and the underlying contracts can be based. In the case of the sovereign sukuk issue the underlying assets were three government buildings. This limitation and the modest size of the issue (£200 m, as compared with a global sukuk market of US$21 b thus far this year, according to Dealogic) in turn emphasise again the original intent of this sovereign issue: to produce a demonstration effect and to serve as a signaling device to the national market for larger, corporate issues in future.

Next Post
Comments are closed.