Robert Stheeman, UK Debt Management Office chief executive told EuroWeek on Tuesday that the UK is in discussions with the Turkish treasury, among other countries, as it targets next financial year for its debut £200m sukuk.
Turkey came to market with its debut $1.5bn sukuk in September last year, having spent many years deciding whether or not to issue an Islamic deal. In doing so, it conducted research, took advice from sukuk pioneers such as Malaysia and traversed many of the ideological obstacles that European countries might face in bringing a first sovereign issue.
While the Turkey deal was a clear success, there are plenty of examples to choose from over the last few years of western issuers in the corporate and banking world that have failed to conquer this market. Goldman Sachs and Thomas Cook never printed their planned sukuks, while General Electric did manage to sell its Islamic paper in 2009 but the deal struggled in the secondary market.
Sovereign sukuk deals are considered to be a more straightforward proposition than a bank or corporate issue because sovereigns have a far broader pool of assets that can be used to back the security at their disposal.
But even with a large asset base for the UK to pick from, Turkey has the benefit of Shariah, legal and political experience to share and some of the more practical and technical aspects of where assets need to be held, for example.
Turkey and the UK are dissimilar enough that Turkey, in dispensing this advice, need not worry that another sovereign is preparing to draw on this valuable pool of investors. Turkey is rated Baa3/BB/BBB- while the UK carries an Aa1/AAA/AA+ rating.
But Luxembourg (rated Aaa/AAA/AAA) and France (rated Aa1/AA/AA+) are rumoured to also be looking at this market, and the UK will be their natural first port of call for a how-to guide. Rates buyers in the conventional market tend to throw those issuers into the same pot with the UK and barely differentiate between them when looking for opportunities to invest.
If sukuk investors do the same, the UK's helping hand could be the same one slapping its own in the forehead when it has to compete for demand against the increased supply in this market, one might suppose.
But that is a short-sighted view. The UK wants to position itself as the western world’s foremost Islamic financial centre, and that gives it something of a duty to encourage the growth of this market, both at home and in the wider western world.
The UK Treasury could find itself torn between the desire to keep the Middle East’s money to itself and honouring the basic Islamic principle of casting aside selfishness to further the good of all. To become a hub of expertise and excellence in the Islamic financial world, it should choose the latter option by demonstrating the wealth of Islamic finance knowledge that it is now accumulating.