The Treasury’s sharia bonds should be welcomed

Joe Wright, 30 October 2013

The Prime Minister announced yesterday that the UK is to be the first western country to offer sharia-compliant bonds. In the second phase of a drive to reassert London’s place as the world’s financial capital, the Debt Management Office (DMO) will offer ‘sukuk’ bonds of £200 million. Sharia law forbids investing in companies that gamble or sell alcohol. It also forbids riba i.e. the charging of interest, prohibiting Muslim investors from buying gilts.

In Sharia-Compliant Finance, if you needed a loan to buy a new car, for example, the bank would have to buy the car for you at above market price and then you would pay the bank back in instalments – no charge of interest has taken place. The fee becomes a profit rather than interest payment for the bank. With sukuk bonds, rather than the government paying interest on the gilt, it will sell a certificate and then “rent” it back from the investor for an annual fee and promise to buy it back when the term expires. The London stock exchange is also creating a new ‘Islamic Market Index’ which will track exclusively sharia-friendly businesses.

This all comes as part of the Government’s bid to reassert London’s role as the world’s financial capital and find new sources of investment for the UK. David Cameron wants London to “stand alongside Dubai as one of the great capitals of Islamic finance”. As we found out last week with George Osborne’s trip to China, he also wants London to stand alongside Hong Kong as one of the great capitals of Chinese investment, having secured London’s place as the first western capital to be able to trade in renminbi.

The problem, however, is that many people believe we need far less focus on the financial sector and far more on productive industries, which is presumably why Mr Cameron also chose to announce a small boost to the Small Business Growth Fund of £4.5 million in the same speech. Plus many also remain concerned about the increases in foreign ownership and involvement in UK business, concerns which the Government’s recent actions suggest it does not share at all.

Be that is it may, sharia investment funds are worth roughly £1.3 trillion and the market is rapidly expanding. Islamic finance is growing 50 per cent faster than traditional banking. Aside from the possibilities for UK businesses in all of this, better ties to Islamic countries is surly a desirable thing, and it is positive that the UK is at the front of it. As the Independent reported, it is not the case elsewhere, PwC Malaysia’s Mohammad Faiz Azmi claimed “the Americans don’t even want to talk to us because they’re frightened of the word sharia.” The UK, however, really is open for business, and as long as that investment is channelled into the right places and the right sectors, it should be welcomed.