To fanfare, George Osborne has announced that the UK is to launch a £200 million Sharia compliant bond, or Sukuk. This will be the first such issuance by a non-Muslim country, and is intended to tap into the oil wealth held by the Islamic world.
The Sukuks have been around for quite some time, every major investment bank will now have its own in-house team of Islamic scholars to ensure that these bonds do not fall foul of restrictions on usury. The market for Sukuk has been growing and maturing over the last ten to fifteen years, and they have become an attractive asset in their own right as they can be traded in the secondary market, and so offer investors liquidity.
There are complications, and resolutions are very sensitive matters. The complications arise when such an instrument is considered to be a Reverse Tawarruk, when the ownership of the underlying asset and its benefits are in question. Classically this will happen when the asset is sold on through the secondary market. Quite how all of this is interpreted are beyond me, and I claim no special insight into the workings of Islamic finance. What I can foresee, though, is a huge raft of problems (Paul Goodman at Conservative Home has highlighted some questions raised by the Conservative Opposition when this was first suggested in 2008 – have they been resolved? – Ed)
For the Sukuk to remain Sharia compliant, it necessarily surrenders itself away from the jurisdiction of the UK civil courts to the Islamic courts. This automatically exposes the UK to elements well beyond its control and to the potential for political disaster, for if somehow this Sukuk is seemed Reverse Tawarruk, the UK risks offending the Muslim world. Already in planning to issue the Sukuk, Osborne is risking offence by appearing to be a Christian country looking to take advantage of Muslim wealth. A sort of financial imperialism.
So that’s the risk. Now what about the reward? This Sukuk depends entirely upon the rate of return being worth the counter-party risk, i.e. the UK’s ability to pay back the loan, and the investors’ willingness to hold sterling. With the current deficit of £120 billion and a headline national debt (one that does not cover pension liabilities of issued gilts), of £1.3 trillion, both of these key issues remain unlikely. In other words, why would the Islamic world want to lend the UK any money at all? The lack of any real interest can be demonstrated by the fact that this Sukuk is designed to generate only £200 million, a tiny drop into the UK’s financial ocean.
So on balance, I would say with over twenty years capital market experience, that this is not a healthy risk/reward profile for Osborne, and suggest that he thinks again.