Britain has become the first western country to issue an Islamic bond, attracting orders of more than £2bn from global investors for its sale of sharia-compliant debt.
London’s maiden “sukuk” will pay out profits based on the rental income from three government-owned properties in lieu of interest, which is forbidden under Islamic religious law.
The £200m sale, which comes days before the start of Ramadan, was heavily oversubscribed by investors in the UK, Middle East and Asia, attracting orders of £2.3bn – 10 times higher than the amount sold.
London is hoping to secure its place as a global hub of Islamic finance, and the issuance of a sukuk is part of a long-term economic plan to make Britain the centre of the global financial system, said George Osborne, the chancellor.
“We have seen very strong demand for the sukuk, resulting in a price that delivers good value for money for the taxpayer,” he said. “I hope that the success of this government issuance will encourage further private sector issuances of sukuk in the UK.”
British grocer Tesco issued a sukuk in 2007 through its Malaysian arm and Ocado, the independent online grocer, borrowed £10m in a sharia-compliant loan in 2009. Some of the UK’s largest property companies have already expressed interest in the idea of raising finance through Islamic bonds said one banker, but so far only one domestic company – small Yorkshire-based manufacturer International Innovative Technologies – has borrowed money in the UK via a bond that complies with Islamic religious rules.
South Africa and Hong Kong have stated interest in planning Islamic bonds of their own and Luxembourg is expected to issue a €200m bond this year.
“The issuance of a UK sovereign sukuk sets a precedent for the western financial world with the high demand hopefully encouraging further issuance from western countries and corporates,” said Humphrey Percy, chief executive of The Bank of London and The Middle East.
The UK’s five year Islamic bond will pay out an annual “profit” of 2.036 per cent, set at the same rate as the yield on the UK’s equivalent five-year government bond.
HSBC, Malaysia’s CIMB, Qatar’s Barwa Bank, National Bank of Abu Dhabi and Standard Chartered were responsible for marketing the bond. According to HSBC more than a third of the issuance went to UK investors, with the remaining bonds sold in the Middle East and Asia.
The sale is small in terms of overall sukuk issuance, which has exceeded $21bn this year according to Dealogic, but was popular with Islamic investors in search of high grade debt.
Since the beginning of 2013, there have only been four triple-AAA rated Islamic bonds, three of which were issued by the Islamic development bank in Saudi Arabia, and one of which was issued for public sector finance in Malaysia, according to data from Dealogic.
“The UK government bond will be particular attractive to Islamic banks because they need to hold highly rated paper to meet the requirements of Basel III,” said Farmida Bi, European head of Islamic finance for law firm Norton Rose Fulbright.