U.K. Backing for Sukuk Just After Starting With UAE Deal

Bloomberg, Britain is raising its commitment to expanding its role in the flourishing global industry for Islamic finance.

U.K. Export Finance, the UK’s export-credit body that is backing a proposed sale of Islamic bonds by Emirates airline, plans to increase guarantees to other industries, stated by Hugo Swire, minister of state. UAE is planning to raise about $1 billion from its first sale of sukuk in two years, two insider people said.

The market showed a “high level of interest” in UAE plan, Hugo Swire, who became Britain’s minister with responsibility for Islamic finance after the resignation of Baroness Sayeeda Warsi in August, said in an e-mailed comment from London on March 12. “UK Export Finance expects to incorporate the sukuk guarantee into its standard product range so that it’s available for future transactions in other sectors.”

The guarantee from the U.K., rated Aa1 at Moody’s Investors Service, for unrated UAE underlines the country’s commitment to developing its role in Islamic finance, whose assets have almost doubled to $1.8 trillion in the past five years. UK became the first non-Muslim country to sell a sovereign Islamic bond when it issued a 200 million-pound ($296 million) sukuk, which has been followed by offerings by Luxembourg, Hong Kong and South Africa.

Bank of England

The U.K. sold sukuk due July 2019 at a profit rate of 2 percent, receiving orders worth more than 10 times the amount raised. The yield on the debt dropped four basis points this year to 1.12 percent at 11:31 a.m. in London. The UK government is “fully committed” to Islamic finance as a source of funding, as stated by Swire.

“We’re trying to get clear information into the market about the features of sukuk issues so that people can make a firm choice,” he said. “As people know more about these products, and decide that it works for them, we will see more sukuk issues.”

The Bank of England plans a feasibility study this year for an Islamic liquidity facility for the country’s lenders, and the government has set up a Global Islamic Finance and Investment Group “to help professionals in this field bring the market to its full bloom,” Swire said.

The government has at least five fully Islamic banks and more than 20 other institutions offering Islamic products.

About $1.8 trillion in assets are held by Islamic financial institutions the world over, as stated by the Standard & Poor’s Islamic Finance Outlook 2015, published in September, from about $1 trillion five years ago.

Emirates Sukuk

The rate of growth hasn’t attracted the U.K. to sell sukuk again. All the debut sovereign issuers that entered the market last year, including Britain, have said they have no near-future plans to issue. Luxembourg said it wants to sell its second Islamic instrument in 2016.

UAE hired Citigroup Inc., HSBC Holdings Plc, JPMorgan Chase & Co. and National Bank of Abu Dhabi PJSC to arrange the UKEF-backed bond sale, an insider person said last week.

The airline last sold sukuk in March 2013. The yield on the $1 billion of notes due 2023 fell 12 basis points this year to 3.8 percent, according to data compiled by Bloomberg. That compares with a 13 basis point drop to 4.2 percent in the average rate of sukuk in the Middle East through March 13, stated by JPMorgan indexes.

The United Arab Emirates is the eighth largest market for U.K. exports, according to Bloomberg data.

“UKEF-wrapped sukuk represents such a good fit with the needs of customers for U.K. exports and expectations of the market,” Swire said. “Islamic structures can have an ongoing role to play in financing U.K. exports, as well as offer further opportunities for investors to buy high-quality Islamic assets supported by the UK government.”