Britain will announce its determination to launch the first Islamic bonds by a western government, in the clearest sign yet that long-running doubts over costs and pricing have finally been put to rest.
Kitty Ussher, the UK’s economic secretary to the Treasury, will say there is a “powerful momentum” behind the plans, which will cement London’s position as the leading western centre for Islamic finance.
The government unveiled hopes to issue Sharia-compliant bond, or sukuk, to much fanfare in April 2007. Since then, the initiative has been hotly debated, with some civil servants raising concerns over the costs of issuing sukuk, which are far higher than for conventional bonds because of their complex structures to avoid paying interest in line with strict religious laws.
The government is convinced the political and financial benefits far outweigh worries about cost. It also believes the bonds can be priced competitively to attract buyers, another concern of some civil servants.
Ms Ussher spoke to the Financial Times ahead of a seminar on Islamic finance on Monday, where she will outline the government’s position.
She said: “This is an important market for Britain, which we are committed to growing.
“Although we don’t see this as a competition between financial centres, London is now established as the most important western centre for Islamic finance. New York has missed the boat.
“We are determined to issue Islamic bonds. It will bring money to London and send out a strong positive signal to the Muslim community.”
Bankers say a sovereign UK Islamic bond would be a milestone for the $80bn sukuk market, one of the world’s most rapidly growing, as it would boost liquidity and encourage other western governments and institutions to follow suit.
So far, the only western issuers of sukuk are a Texas-based oil group , a German state and the World Bank. The bulk of issues have come from the Middle East and Malaysia, making up about 90 per cent of the market.
Bankers predict the bond will be launched next year and be of benchmark size, which means about £500m.
A bond of this size would help Islamic banks by giving them the ability to buy safe triple A rated paper, which will improve their balance sheets and provide them with collateral for other lending operations.