Sukuk key financing tool overseas

By Kim Da-ye

If sukuk issuance faces any obstacle abroad, it would be due to doubts on the profitability of the Islamic bonds and not submission to a religious uproar against them.

Global sukuk issuance reached a record high of $51.2 billion in 2010, up 34 percent from the previous peak in 2007, Standard & Poor’s (S&P) said in a report, Tuesday.

The overseas sukuk markets are rather concentrated in the Middle East and Southeast Asia. Malaysia accounted for 78 percent of all sovereign and quasi-sovereign issuances in 2010 and 63 percent of cumulative amounts between 1996 and 2010, S&P said.

The global credit rating agency said it does not see much growth of sukuk issuance in non-Muslim countries, but the reason wasn’t religious.

“During the economic crisis, Western investors showed a market interest in sukuk, partly because their average yield has been slightly higher than that available on a ‘plain vanilla’ conventional comparable instrument, owing to their structured nature and lower liquidity,” S&P said.

“However, we believe this trend will slow down once rates begin to rise, which will increase the average yield of conventional bonds.”

Britain planned in 2007 to issue sterling-denominated sukuk, but cancelled them because, according to Bloomberg, they weren’t expected to provide value for money.

In general, the expansion of Islamic banking has met little ideological resistance. John A. Sandwick, a Geneva, Switzerland-based Islamic finance consultant, said that there was “a very modest amount of opposition from reactionary fundamentalist Christian groups” in the U.K. to the change in tax treatment of profit payments on Islamic bonds.

The principle of prohibiting making money out of money sounds against the very nature of banking and finance, but Islamic financial products and services found their way to reach some of the most capitalistic markets like London.

In Britain, HSBC Group set up a global division catering to Muslim communities called HSBC Amanah. Lloyds TSB provides diverse Sharia-compliant products including the Islamic Student Account and a specialized bank called the Islamic Bank of Britain is operating there.

Former Prime Minister Gordon Brown endorsed Islamic finance and Sharia-compliant financial frameworks back in 2006 as the Chancellor of the Exchequer, arguing that the U.K could become a gateway for Islamic trade and finance.

This is similar to the Korean government’s initiative to introduce Islamic finance to the domestic market.

“We will first overhaul the system by supporting the issuance of sukuk highly demanded by companies, and we will establish an Islamic finance sector step by step,” the Ministry of Strategy and Finance said in a statement in September 2009.

Britain and other European countries, however, aren’t completely free from opposition against Islamic banking which is mainly socioeconomic rather than religious.

Statistics show that Muslims made up some 2.8 percent of the British population in 2001, and the figure is expected to have grown greatly. The “Islamization” of Europe is a common topic of political discussions.

A 2009 column by Melanie Phillips, a writer for the conservative Daily Mail, best-describes such fear, “They advocated Sharia finance as element of a separate, self-sustained Islamic order with its own Islamic ideology, Islamic politics and Islamic economics that taken together would guarantee an Islamic way of life and ultimately the Islamic state as the first step toward establishing Muslim rule worldwide.”