What are “sukuk”, British Treasury bills conforming to Islamic rules?

Posted on Apr 2, 2021, 11:00 AM

For the second time in its history, the United Kingdom announced on March 25 that it had issued sovereign debt securities in accordance with Islamic law, known as “sukuk”. After raising £ 200m in 2014, the UK Treasury this time issued £ 500m in government bonds. Demand had exceeded 625 million. The investors who came forward are from the UK and “major centers of Islamic finance in the Middle East and Asia,” the UK Treasury said in a statement.

“By launching our second sovereign sukuk, we are consolidating the UK’s position as the world’s leading center for Islamic finance outside the Islamic world,” said Chancellor of the Exchequer, Rishi Sunak. The strong investor demand for these sukuk means that we have secured a good price for the taxpayer and will help us to develop our relationship with Islamic economies around the world. “

1) What are the principles of Islamic finance?

Muslim business law prohibits interest (“riba”), like any form of remuneration linked to time, because the rent “generates social injustice”, explains to “Echoes” Kader Merbouh, independent consultant in the sector. Compensation must be the result of risk taking. Contracts should not incorporate uncertain elements, such as options.

Speculation and short-term trading are also prohibited. Finally, it is forbidden to invest in activities prohibited by Muslim law, such as pornography or alcohol. These principles, which are based on Muslim sacred texts, have been clarified by several centuries of jurisprudence which today form Muslim business law.

2) How does this translate into sukuk?

“Sukuk” is the plural of “sak”, which gave the French word “chèque”. It is about a “title of joint ownership which gives right to a return, a usufruct on the basis of this title”, specifies Kader Merbouh. In other words, the return is not based on interest paid by the borrower, but on regular income generated from assets used to pay investors an agreed rate of return. The borrowed amount is repaid to investors at term. In the case of the UK, the Treasury said the rate of return was set at 0.333% and would be paid for with income from “government properties.” “

In 2014, Luxembourg had backed sukukes against three state-owned buildings. “During the duration of the transaction, the ownership of these is transferred to a Luxembourg company specifically created for this purpose,” the Ministry of Finance explained at the time. It is this company, 100% owned by the Luxembourg State, which is formally the issuer of the sukuk. In accordance with the principles of Islamic finance, the investor does not receive interest, but is remunerated through the rents received for the underlying buildings. “

Sukuk issues are not unique to states. Companies also use it, in particular to raise funds in the countries of Islamic cooperation. “This is particularly the case with banks or companies specializing in infrastructure (civil aviation, telecommunications, real estate)”, explains Anouar Hassoun, director of the MBA in Islamic finance at Financia Business School. The yield of the loan is then backed by income derived from the object of the financing (housing, infrastructure) or not.

3) What is the advantage for creditors to resort to sukuk?

The first motivation of Western states which resort to sukuk, like the United Kingdom, is a desire to “diversify their portfolio of investors”, notes Anouar Hassoun. A number of institutions like Islamic banks, funds and insurance can only invest in these types of products. Traditional investors can invest in them by taking into account only the criteria they traditionally use.

Islamic finance represents a market of $ 3 trillion in assets, with growth of around 11% (excluding 2020) on average over ten years. “It’s three times faster than conventional finance, but there is a catching-up effect,” says Anouar Hassoun. “It is therefore a significant alternative financing method” since this money can not be invested on the conventional market, believes the specialist.

However, a state like the UK does not necessarily need more investors. “It is a signal effect”, judges Anouar Hassoun. It is a question of demonstrating an opening of the British market to these investors. “It’s a way to send a positive message to investors in the Middle East,” abounds Kader Merbouh, especially at a time when investors are leaving the United Kingdom due to Brexit.

4) What place do sukukes occupy today in Europe?

Only two countries in Western Europe have issued sovereign sukukes: the United Kingdom, on two occasions, and Luxembourg. In 2004, a German Land, Saxony-Anhalt, preceded these two states by raising 100 million euros in this way. Note that “the issuance of sukuk does not worsen the public debt with regard to the Maastricht criteria”, specifies Tarik Bengaraï, president of the Independent Committee for Islamic Finance in Europe (CIFIE).

As for other sukuk, issued in particular by companies, he notes that “Luxembourg is, to date, the most important European home for Islamic investment funds and occupies the fifth place in the world in this sector. It was also the first country in the European Union to be admitted to the Board of the Islamic Financial Services Board (IFSB), ”a global regulator in Islamic finance. The second European country which is also an associate member of the IFSB is the United Kingdom, “a leader in this field for a very long time”, adds Tarik Bengaraï.

In other countries, such as Germany, Spain or Italy, a market exists but “it remains a niche market”, explains the one who is also a member of the Islamic Finance Commission of Paris-Europlace. In France, the idea of ​​issuing sovereign sukuk, for a time considered by the government of Nicolas Sarkozy, did not materialize. However, legislation was put in place in 2011. Which has enabled several large banks to develop labeled products in accordance with Muslim business law.

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