The Chancellor writes in today’s Financial Times that he wants Britain to be “the unrivalled western centre for Islamic finance” and “the first sovereign to issue an Islamic bond outside the Islamic world”.
As he explains, “Sukuk bonds do not pay interest but instead entitle investors to a share in the returns generated by an underlying asset, such as property, making them Islamic-compliant”.
I am not an expert in Islamic finance; nor will many of our readers be. Those who are interested, however, may wish to turn to Hansard’s account of the proceedings of the 2008 Finance Bill, which gave government power to issue such bonds.
Readers will see that members of the then Opposition asked a series of questions about the Government’s intentions, from which I take my own below. (I draw readers attention in particular to the expert speech made by Greg Hands.)
- What sort of assets does Osborne have in mind, given that they themselves must apparently be sharia-compliant?
- Is the Government proposing to make payments under the terms of the bonds in currencies other than sterling?
- If a special purpose vehicle acts as the issuer of a sukuk bill, and uses the proceeds to acquire the assets which are to be leased, who will control them while they are owned by the vehicle?
- What scale of issuance do Ministers believe is required to bring the price of a sukuk bill in line with that of a conventional one?
- What effects does the Government believe that the issuance of a sukuk product would have on the conventional bill market?
- Since there are potential risks to the taxpayer in the issuing of sukuk bonds or bills, would it not be best for any proposal to issue them to be contained in a bill which, unlike secondary legislation, can be amended?
- Since it is in the nature of a sukuk bill for holders to share risk, will they in turn demand high returns – leading to high costs for taxpayers?
- For a product to be sharia-compliant it must be approved by a board of sharia scholars. Which scholars is the Government planning to consult?
- Are Ministers planning to make other new uses of structured notes (i.e: means of borrowing money without paying interest?)
- What assessment has the Government made of the risks to its standing as a sovereign borrower of the use of structured notes?
The then Minister, Kitty Ussher, explained to the Committee that the Labour Government had “two main motivations for proceeding in this way”. The first was to boost jobs and prosperity in the City.
The second was indirectly ” to help the development of Islamic retail products if the outlet on the high street were able easily to invest in sharia-compliant Treasury bills, therefore ensuring that the entire investment chain is sharia compliant”.
Hands made the point that “Sukuk bonds are fine in principle and we want to encourage Islamic finance”, and I agree that there is no intrinsic problem in having financial arrangements or instruments that bar the payment of interest.
Readers will also see that the Conservative committee members voted against the Government clause in question, because the questions they raised had not been satisfactorily dealt with. Are the answers clearer now that roles have been reversed?