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UK sukuk is a one-off that bears repeating

By Dan Alderson
26 Jun 2014

The world has changed. From this week we are living in a post-UK sovereign sukuk era, where all things in Islamic finance seem possible and the market is alive with imaginings of follow-on deals and projects to come.

Or, as GlobalCapital's managing editor put it to Debt Management Office chief Robert Stheeman, “Never has so much work gone into something so small.”

This comment refers to the nine months of work put into the £200m debut, by a country that borrows £100bn a year. It was beautifully illustrated by the UK pricing £5bn of 30 year conventional Gilts (with books passing £10bn in half an hour) this week.

But the true value of the UK sukuk is still to be decided — and the decision lies with the UK Treasury now that the deal is done.

The sukuk has non-tangible benefits, say Islamic finance practitioners. Observers will take the UK government more seriously when it talks about being a centre for Islamic finance.

The deal could also serve other market purposes — such as providing an immediate pricing point for domestic issuers and encouraging other governments to look at Islamic finance.

It's clear, however, that the sukuk wasn’t intended as useful government financing. But after all the hard work and investment in expertise, there is no reason for the government to write it off as a loss-leader. There is every reason to build on what it has done and achieve an economy of scale.

For years, the Treasury’s sticking points with issuing a sukuk were whether it would have any demand and whether it would provide value for money. Those questions were given the clearest possible answer this week in the form of a £2.3bn diverse, non-traditional book and pricing that was flat to the July 2019 1.75% Gilt.

Despite the DMO’s stance that this is a one-off, the UK has all the encouragement it could need to repeat this success at a larger scale.

Next time around it won’t need to agonise over assets, stress over structuring, or lavish lolly on lawyers. It can keep costs low and follow Turkey’s example of making sukuk a vibrant funding tool.

Or it can file the sukuk as a neat political stunt, shoulder the loss and walk away. With financial secretaries recently changing guard every year and a general election coming in 2015, the political will behind a long-term project might be weak. But between the politicians, the Treasury and the DMO lies the chance to make sukuk a true UK funding tool for a new era.

By Dan Alderson
26 Jun 2014