The British government recently issued its first sukuk, a financial certificate compliant with Islamic law. As Islamic finance becomes more mainstream, other European governments could follow suit.
This summer, the British government became the first non-Muslim government to issue a so-called sukuk, a financial certificate that complies with Islamic law, by virtue of which government bonds were made available – by being halal – to Muslim investors. The first round, on June 25th, was for £200 million worth of bonds, maturing on July 22nd, 2019 at a profit rate of 2.036 percent (the same as the yield on Britain’s benchmark five-year government bond).
As it turned out, the demand is there, as orders totalled roughly £2.3 billion, with a range of investors bidding, such as sovereign wealth funds, central banks and British and international financial institutions. Robert Stheeman, chief executive of the UK Debt Management Office, stated, “at this stage it’s planned just to be a one-off. It has not proven easy to find enough assets either for bigger size or for a programme of issuance. But we are pleased with the result.”
The absence of sukuks have made it quite challenging to design long-run, low-risk types of investments, such as pensions. According to Islam, earning a profit off money is haram, or forbidden. As such, conventional interest is replaced by rent from three publicly owned office buildings and the like in the British sukuk. In this way, the profit obtained from the investment is an income, not an interest, and fully halal.
Another example is mortgages, where the bank essentially buys the house, while the mortgage holder pays a rent to the bank for a specified duration of time, upon which the bank hands over the house. The Islamic Bank of Britain has offered such mortgages and other products and services, all in compliance with sharia law.
The Islamic Bank of Britain and now the British government are securing a share in the growing market for Islamic finance. The value of Islamic investments worldwide in 2014 is estimated at £1.3 billion, and it is set to double in a few years’ time. The assets of Islamic financial institutions grew by an average of 15 percent per annum from 2006 – 2011, reaching over $1 trillion in March 2011, suggesting robust demand for Islamic investing. HSBC expects Islamic finance to continue to grow at this rate, making total assets in Islamic finance as high as $4 trillion to $5 trillion by 2015.
The world’s Muslim population is expected to increase by about 35 percent in the next 20 years, rising from 1.6 billion in 2010 to 2.2 billion by 2030. Forecasters expect the Muslim population to grow at roughly twice the rate of the non-Muslim population until 2030 due to higher-than-average fertility and immigration. Demographics have made sukuk and other halal investment products increasingly popular and profitable.
In Britain, Muslims are expected to form 8.2 percent of the population by 2030, up from 4.6 percent today. Perhaps in recognition of this trend and the tremendous potential in it, the British government created the sukuk. It is partly due to the relatively multicultural nature of British society, as well as a highly advanced financial sector, but it is just as much a consequence of British law being the foundation of an estimated 80 percent of sharia-contracts worldwide. It just so happens that the UK legal framework is preferred for contracts between Muslims from all over the world, possibly thanks to some foresighted British lawyers who set up offices in the Middle East and established themselves as experts decades ago.
Given that the Austrian Muslim population is projected to reach 9.3 percent in 2030, up from 5.7 percent today; the Swedish, 9.9 percent (up from 4.9 percent today); the Belgian, 10.2 percent (up from 6 percent today); and the French, 10.3 percent (up from 7.5 percent today), the UK could become a frontrunner for other nations in creating a sukuk.
The overwhelming success of this first British sukuk is indicative of the potential in this market. However, it is also a sensitive, political issue in some countries, making the road forward in these places much more rocky than it has been in the UK. So far 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.
However, if and when other sovereigns – or indeed corporate actors – join Britain in issuing sukuks, it will be a while before the voracious demand is satiated.
