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UK Islamic banks should suck it up and buy UK sukuk

By Dan Alderson
17 Jun 2014

The UK’s Islamic banks have good grounds for fury at missing out on the UK sovereign sukuk mandate. But for their own sakes, they must keep faith that the deal is a dress rehearsal for something bigger, and turn up in size to buy the paper.

The UK struck a bum note with its sovereign sukuk plans last week. By some strange misfiring of logic, the government managed to announce a Middle East-focused roadshow late on Thursday, when no-one in the Middle East was likely to be paying attention –Friday is the Islamic holy day.

But its bigger gaff caused rancour closer to home. No UK Islamic banks got the mandate, even at sub-arranger level. For a deal supposed to demonstrate the government’s commitment to supporting Islamic finance in the UK, this sent a signal to the existing players that their services were not required, which rightly set their blood boiling. But the decision is made. The best move for the UK Islamic banks is to suck it up, and place more confidence in the government’s plan than it placed in them.

The reason they should sit tight is that the story is not really about what happens this time. The UK has a history of bungling when it comes to Islamic finance, but if ever there was a slam dunk deal it is this small £200m sukuk.

On the technical front the Debt Management Office (DMO) and the Treasury have left nothing to chance. The Treasury should be commended for its choice of arrangers, even without a UK Islamic bank’s honourable mention on the ticket. It should also get plaudits for taking the roadshow far and wide, visiting investors in Qatar, Saudi Arabia, the UAE and Kuala Lumpur. The fact that it is doing such extensive marketing for a £200m issue should convince doubters that this is not, as previously billed, a one off.

What the UK is doing is giving its debut sukuk every chance to succeed. The deal is likely to be hugely oversubscribed – despite its low yield – and there will be a lot of disappointed bidders.

Nor should the UK banks take umbrage or cry foul again if they are among the under-allocated. Once this minor hurdle is passed and the UK’s story told, all sorts of doors should open up.

For the UK’s Islamic banks that could mean a bigger and more confident sovereign sukuk programme. However unfair they deem the selection process this time around, at least there will be a better chance to pitch for the next.

But, moreover, a successful sovereign sale could spur first UK municipalities and then small to medium sized enterprises to follow suit with domestic sukuk. This is where the UK Islamic banks can really come into their own and offer precisely the kind of hands-on specialist knowledge and attention that big banks have failed to muster for smaller borrowers in recent years.

It is easy to lament that the UK government does not really care about Islamic finance. It is commonplace to opine that it is only doing this deal to encourage inward investment in infrastructure by big sovereign wealth funds overseas. All of this may be true. But the best chance for the government’s pledges of support for Islamic finance is a big sovereign sukuk result – which ought to follow this tiny debut deal. The UK’s Islamic banks should hold their noses with one hand, place their orders with the other and rally around the cause.

By Dan Alderson
17 Jun 2014