Britain is to become the first western government to issue shariah-compliant bonds as it seeks to turn London into the world centre of Islamic finance and build bridges to the Muslim community.
The Treasury will announce today that it is paving the way for the launch of the first bonds no later than next year – and perhaps within the current financial year.
The move, to be unveiled by Ed Balls, the City minister, is unprecedented. Shariah-compliant bonds have previously been issued by the governments of Pakistan and Malaysia and also by corporate issuers around the world but never by a western nation.
The UK would aim not only to issue the new bonds on wholesale financial markets but also to use them as vehicles to allow Muslims in Britain to invest in National Savings products through banks and post offices.
Mr Balls believes that the launch of Islamic bonds by the government will help to underpin London’s role as an international financial centre. The Treasury estimates that total Islamic finance assets worldwide, including private equity and bonds exceed $250bn
But Mr Balls also believes that today’s move will send a powerful message to the Muslim community both in Britain and around the world that the UK authorities are intent on engaging with them in innovative ways.
Mr Balls held a meeting with leading Muslim figures in the UK, including the Muslim Council of Great Britain, last Monday.
He came away convinced of the strength of support for government action in this area.
A senior Treasury figure said last night: “We hope Muslim leaders will be impressed that we are now moving towards doing the technical work on this bond issue so quickly.”
The Treasury has not yet worked out what the underlying structure of UK-issued Islamic bonds will be. However, Mr Balls is confident that the technical details can be worked out by the Debt Management Office and Treasury officials.
Issuing sukuk, or Islamic bonds that make regular payments to investors, is usually slightly more expensive than raising funds with western-style bonds, because these instruments require extensive, costly legal and religious advice. Moreover, the market is so young that activity is more fragmented and opaque than in other sectors of finance.
London is far ahead of rival western financial centres, such as New York, Tokyo or Frankfurt, in terms of its success in attracting Islamic financial business.
However, it faces growing competition from centres in the Islamic world, such as Riyadh, Bahrain, Dubai or Kuala Lumpur.
In an attempt to maintain an edge, the government has already taken a number of measures designed to promote the UK as a hospitable environment for Islamic finance.
They include measures that allow sukuk to be issued, held and traded in the same way as corporate bonds. The move is expected to increase primary issuance in the UK. There is also an increasingly lively secondary sukuk market.