Sukuk can give London a leg up in market

London is looking to its burgeoning market in Islamic finance – already the largest in the Western world – to boost its reputation as a financial centre, banking on growth in an industry with the bonus of being partly shielded from the global credit crisis.

An eagerly awaited decision next week by the British government on whether it will borrow money by issuing a sovereign Islamic bond, or sukuk, could open up new avenues in a market that Standard & Poor’s estimates could reach $4 trillion (Dh14.7trn) overall.

“We are very excited,” said Humphrey Percy, the chief executive of the Bank of London and the Middle East, one of four Islamic banks in the capital. “It will further underline London as an global Islamic financial centre because it will be the first hard currency, highly rated, government sukuk to be issued.”

Islamic financing is increasingly seen as a key support for the city in its competition with other centres such as New York, after London’s reputation as a financial hub took a beating thanks to the failure of Northern Rock and criticism of proposals to raise taxes on wealthy expatriates.

The international sukuk market grew by 75 per cent to reach $85 billion in the first half of 2007. The $24.5bn raised in the first half nearly surpassed 2006 new issuance of $26.8bn, according to the Islamic Finance Information Service.

The potential of the commercial sukuk market was revealed recently by the launch of a $300 million convertible bond for Tamweel, the second-largest mortgage lender in the UAE. Tamweel said its December bond issue, again managed by Barclays Capital, was oversubscribed within hours.

Rodney Wilson, chairman of the London-based Institute of Islamic Banking and Insurance, noted that some other deals had been put on hold – UAE-based Dana Gas postponed placing its $1bn sukuk until September due to credit market weakness, while First Gulf Bank of the UAE and Bahrain’s Ithmar Bank announced deferment of their issues. “On the other hand, there is no Islamic financial institution which is in trouble,” he said.

Wilson added that the British government is expected to go ahead with the sukuk even after a furore earlier this year over comments from Rowan William, the archbishop of Canterbury and the head of Britain’s Anglican Church, that a limited application of Shariah in Britain was inevitable.

“Islamic finance is a tool that the government realises it has in its hand, which it can utilise to re-establish some clear blue water between themselves and Wall Street,” said David Testa, the CEO of Gatehouse Capital, which is expecting to receive its licence to become the fifth standalone Islamic bank in London within weeks.

While more than two-thirds of Islamic finance business is currently originated in the Middle East, the oil-rich region is increasingly looking to international capital markets to finance its grander development projects. A $1.5bn sukuk issue from Dubai Ports World and arranged by London-based Barclays Capital last year allocated 60 per cent of its paper to Western buyers.

A British government sukuk – which could be announced in next week’s annual budget – would increase liquidity in the market and expand the secondary commercial market in the takaful, or Islamic insurance, sector. (AP)