ABA Corpororate Member Mishcon de Reya has published its 'Enforcement Watch' for January 2018, detailing several recent regulatory actions and notifications, and highlighting issues that are appearing on the horizon. It's essential reading for those working in financial services in the UK.
Middle East banks in London urge more UK sovereign sukuk issuance
Developing the UK’s Sovereign Sukuk Issuance: Suggestions from the banks
Two years after the British government launched the first sovereign sukuk to be issued outside the Islamic world, the Arab Bankers Association asked London-based Middle Eastern banks that are active in the Shari’ah-compliant market to suggest how the British government could develop a programme of sukuk-issuance to capitalise on the success of that initial issue.
Five banks responded to the questionnaire. Here is what they said.
Issue Size: individual transactions should be larger than £200 million
All five banks want to see more frequent issuance by the UK government, and in greater amounts than the £200 million issued in June 2014. Several banks commented that the June 2014 issue attracted bids of £2.3 billion. Two key objectives emerged from the banks’ responses: the desire for a yield curve and the desire for high quality liquid assets (HQLA) that the banks can use to meet their liquidity requirements.
All banks pointed out that demand for UK sovereign sukuk would come not only from UK-based Islamic banks but also from global investors such as sovereign wealth funds, central banks, and private institutional investors.
The respondents seemed to feel that issuances of about £500 million would be easily digestible by the market. One bank noted that the Islamic Development Bank successfully issues one or two transactions per year, with sizes up to $1bn. Since the sterling market is smaller than the dollar market, this bank suggested that a single annual issue of £1 billion, or biannual issues of £500 million, would be appropriate.
Pricing vs. Conventional Bonds: no need for an Islamic premium
All five banks believed that UK government sukuk should be priced on par with conventional UK government bonds (‘gilts’) although some noted that the scarcity of highly-rated sovereign sukuk can create premium pricing against conventional bonds. These banks stressed that such pricing differentials relate only to availability and not to fundamental creditworthiness.
Maturity of issues: divergence of views
All respondents wanted to see a variety of maturities being issued, with three and five years the most common cited. However, some banks were keen to see shorter maturities while one bank wanted maturities of up to ten years.
The key point appeared to be the need for a variety of maturities so that a yield curve could be established.
Shari’ah structure of the issue: Ijarah is the most appropriate
The June 2014 was structured as an ijarah, based on rents from UK government buildings. All respondents thought that this was an appropriate structure and most believed that the UK government should use an ijarah structure for any future issues. One bank noted that other structures such as wakala bil istithmar and musharaka would be more difficult to price since their risk profiles would differ significantly from that of a conventional bond.
The June 2014 issue was well managed
Respondents thought that the June 2014 issue was well managed in terms of disclosure and timing although one bank lamented the lack of a UK Islamic bank among the underwriters and two banks thought that the size should have been bigger.
The British government should ensure that UK-based Islamic banks are able to subscribe to future issues in larger quantities
Respondents believed that the British government should ‘reserve’ a portion of future issues for UK-based Islamic banks, or at least ensure that UK-based Islamic banks receive preferential treatment in the allocation process. Some pointed to the lack of high quality liquid assets (HQLA) denominated in sterling that Islamic banks can use for their reserve requirements, although others noted that the need for such HQLA may diminish if the Bank of England begins to issue Shari’ah-compliant liquidity instruments that may be repoed back to the Bank.
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