The United Kingdom is no where nearer to going to the wholesale sterling market to raise financing through a debut benchmark sovereign sukuk in 2012 than it was in January 2011 when Treasury last confirmed that it would not be “value for money” for the UK taxpayer to do so.
The latest minister to reiterate the “not-value-for-money” explanation is Lord Sassoon, Commercial Secretary to the Treasury, and the minister in overall charge of the coalition government's Islamic finance policy.
Speaking last week at the annual Islamic finance seminar organized by City-based international law firm, Norton Rose, and which was held this year at the House of Lords, the minister disappointed an audience comprised largely of bankers, lawyers, accountants and government officials.
A sukuk, stressed Lord Sassoon, "does not currently offer value for money, at a time when Treasury gilts are giving their lowest yield. The priority (for the Treasury) is to raise the cheapest debt in relation to fiscal discipline."
To many of the delegates it was like going back into the past, for they had heard the same old stale arguments some two years ago when perhaps there was a modicum of justification in the Treasury's position.
The Treasury has confirmed that its Debt Management Office had conducted an in-depth quantitative analysis on the raising of finance in the wholesale sterling market through an Alternative Financial Investment Bond (the UK euphemism, sorry legal terminology under the Finance Act, for sukuk) and had concluded that such an issuance currently (since 2010) would not be 'value-for-money'. In other words, according to the Treasury, any UK sovereign sukuk issuance would be more costly to the taxpayer, which in the current economic and financial climate is neither justifiable nor sustainable.
However, what puzzles the City, especially the bankers and lawyers familiar with Islamic finance and who in their time have managed and structured many Sukuk issuances for clients abroad (including sovereigns) given that English Law is by far the preferred jurisdiction of Islamic finance transactions, is the breathtaking lack of transparency on the part of the Treasury.
Why, for instance, many of them emphasize, has the Treasury not published the quantitative analysis which underpins its current policy towards the issuance of a sovereign sukuk? After all, the Conservative-Liberal Democrat coalition government headed by Prime Minister David Cameron supposedly prides its transparent and consultative approach to politics.
They would also like to know the assumptions on which the Treausry's sukuk issuance policy is based and the very yields UK Treasury gilts are selling at. Coty sources have also alleged that the Treasury is using certain outstanding issues relating to VAT (value added tax) in connection with real estate and land-backed Sukuk as a smokescreen to obfuscate any Sukuk issuance. These issues, they add, can be easily resolved if the political will is there.
The irony of course is that in markets such as Malaysia, Turkey and the Gulf Cooperation Council (GCC) countries, whose economic indicators in general and public debt positions are much healthier than that of the UK, sukuk issuances over the last year have proven to be more cost competitive and therefore cheaper than equivalent conventional bonds issued in the these markets. The same is true even of more volatile markets such as Indonesia. The question bankers and allied professionals ask is what makes the UK the exception in the above respect especially given that it is not part of the euro zone and therefore not directly exposed to the euro zone Sovereign Debt crisis?
The real answer it seems is “politics, politics, politics”. City sources stress that a potential UK debut sovereign sukuk issuance is currently obfuscated not by the “value-for-money” reason by three powerful factors.
The first is the politics of Islamic finance. Successive UK governments from Labour under Prime Ministers Tony Blair and Gordon Brown to the current coalition under David Cameron, have been and continue to be overly sensitive to the utterings of the right wing media especially the Daily Mail Group and the Daily Express Group which have bordered on the downright Islamophobic. Headlines such as “Muslims Set to Own Prime (British) Crown Assets” and “Her Majesty's Shariah Treasury” betrays a kneejerk ignorance and mischievous misunderstanding of UK banking law and its facilitation of Islamic finance and the nature of Sukuk structures.
The second factor, according to the sources, is that there remains a small but powerful cadre of Treasury Mandarins (civil servants) who are ideologically (and perhaps religiously) opposed to any issuance of a sukuk (an Islamic financial product) by the Treasury, who it is deemed represents essentially a Judaeo-Christian ethic.
The third factor is the availability of suitable potential asset pools against which the sukuk can be issued. Some of the potential assets suggested by the Treasury in the past, according to the sources, have been the subsoil of some of London's famous bridges and the M6 toll road which in any case is a PFI (public finance initiative). The sheer ridiculousness of the suggestions, assuming they are accurate, underlines how far UK plc still has to travel in terms of a genuine commitment to issuing a debut sovereign sukuk.
As such, in the above context, the Norton Rose seminar, which was erroneously titled “Islamic Finance after the Arab Spring” should really have been titled “Re-emphasizing the Importance of Islamic finance to the UK Economy”. The original title assumes that the Arab Spring is over, when in fact, it has hardly started and will definitely be 'work in progress' for some time to come. In reality the speeches largely reflected what was happening in the UK in the Islamic finance space with only fleeting references to other markets.
One disappointing feature of the attendance was that there was hardly a member of Parliament in sight, although according to the organizers some 12 MPs did confirm that they would attend, but failed to turn up.
Perhaps had they known that the organizers would lay out a decent afternoon tea in the salubrious Cholmondeley Room of the House of Lords overlooking the Thames, complete with scones, strawberry jam and clotted cream; an array of traditional sandwiches including cucumber and smoked salmon, and other cakes, then we may have seen a lot more familiar faces attending.
Lord Sassoon, commercial secretary to the Treasury, nevertheless was upbeat in other respects. "A key feature of London's development as the gateway for Islamic finance into Western Europe has been our commitment to policies that will help create a level playing field for both retail and wholesale Islamic finance. This has resulted in the UK becoming the number one jurisdiction in the Western world in terms of Shariah-compliant assets. As a government, we will do everything reassurable to consolidate Islamic finance as a key part of London's offering as a financial center," he maintained.
He also paid tribute to the previous Labour governments for their work in this space. Perhaps more importantly, he agreed that "however, we recognize that there is more work to be done. We are committed to working with the industry and we are currently undergoing consultation on variable rate Murabahas and Islamic derivatives."
In fact, HMRC in January 2011 put its draft of proposed changes to income and corporation tax to cater for the Shariah compliant equivalent of a variable rate loan and also a regime to cater for the developing market in Islamic finance derivatives out for consultation.
These relate to purchase and resale arrangements in Murabaha contracts including linked ones and where returns are in foreign currency; and those involved in Islamic finance derivatives.
"Islamic finance derivative products," according to the draft, "are a developing area, and often use arrangements such as Murabaha or other combinations of Islamic finance products to bring together the desired product. In order for these arrangements to benefit from the rules contained within Part 7 Corporation Tax Act 2009, some modifications are needed to certain provisions. Our aim is to create a regime for Islamic finance derivatives by creating the concept of an "alternative hedging arrangement". This would be an arrangement in addition to the existing forms of derivative product catered for in Part 7 Corporation Tax Act 2009, but which is broadly equivalent to the conventional products already provided for within the rules."
In fact, the document uses the term "alternative hedging arrangement" instead of the previous "alternative derivate arrangement" as it is closer to the wording used in the ISDA/IIFM Ta'Hawwut Master Agreement.
Farmida Bi, European head of Islamic finance at Norton Rose LLP, emphasized that "Islamic finance can serve as an engine of growth for the UK economy. It can provide much needed revenue and investment at a time when conventional liquidity is in short supply. In the current economic climate, there is merit in exploring alternative forms of funding, and harnessing Islamic finance could be a source of enormous benefit to the UK as a whole. In particular, the launch of an Islamic sovereign bond by the UK would galvanize the market and cement London's position as the hub of Islamic finance in the West." Alas, the minister, Lord Sassoon, was not there to heed her advice having already excused himself to attend another appointment.
Perhaps, the host of the event, Lord Sheikh, and fellow peer, would keep him posted. "In recent years we have seen significant growth in Islamic finance, and Islamic finance has also been less affected by the global financial crisis than conventional finance. Our goal is to ensure a level playing field for Shariah compliant products which will allow Islamic finance to flourish and thus help the entire UK economy to grow," he added.