Britain's plan to issue the first Islamic bond from a Western government will strengthen its position as a centre for sukuk trade, but it may miss a chance to develop Europe's Islamic banking industry.
Last week, Britain mandated five banks to arrange a £200 million ($336 million) sukuk issue, part of Prime Minister David Cameron's effort to protect London against competition from other sukuk hubs such as Luxembourg, Dublin, Dubai and Kuala Lumpur. The sukuk could be issued in coming weeks, subject to market conditions.
Britain's choice of HSBC, Qatar'sBarwa Bank, Malaysia'sCIMB, National Bank of Abu Dhabi and Standard Chartered — big institutions with considerable marketing muscle — as arrangers appeared designed to ensure easy distribution and tight pricing.
But the choice was notable for excluding all of Britain's six full-fledged Islamic banks; none was included in the mandate.
That could reduce the impact of the issue in developing expertise and depth in Britain's Islamic banking sector, the largest in Europe. It may also limit British banks' access to the issue, making it harder from them to use the sukuk to manage their liquidity.
"The UK government's inaugural sukuk transaction is a good step forward as it will create a benchmark and open the market for other UK issuers," said Apostolos Bantis, emerging markets credit analyst at Commerzbank in London.
"However, this particular issue is unlikely to have any major impact right away. There needs to be more frequent issuance and also participation of private banks and corporates to establish a sukuk market out of the UK."
British officials have previously indicated that the upcoming sukuk will probably be a one-off issue rather than the start of a regular issuance programme.
One of the major Islamic banks in Britain is Bank of London and the Middle East, Europe's largest stand-alone Islamic bank, which is building stronger links with the Gulf — last year it opened an office in Dubai and listed its shares on a Dubai bourse.
In February, BLME was one of the co-lead managers of a $1.5 billion sukuk issue from the Islamic Development Bank, the largest ever from the supranational lender.