Britain has become the first non-Islamic nation to issue a sukuk investment bond.
The government has cleared the way for the City to become a destination for Islamic cash by making the sovereign sukuk available.
So far, investors have pumped more than £200 million into a sukuk that matures on July 22, 2019.
Demand for the bond was far greater – with investors putting up more than £2.3 billion in cash for a chance to buy into the sukuk.
As a result, sukuk bonds have been allocated to sovereign funds, central banks and financial institutions worldwide.
The sukuk rate is set at 2.036%, which follows the yield on other British gilts maturing at the same time as the sukuk.
What is a sukuk?
A sukuk is termed an Islamic bond, but is set up in a different way to conventional gilts and other bonds.
A bond is a certificate confirming debt ownership, while a sukuk investor has a share of the underlying asset together with any incoming cash and a slice of the risk of the investment.
A sukuk follows Islamic law – sometimes called Shari’ah law – which bans the charging or paying of interest.
Sukuks are available from Islamic banks and financial institutions. The central bank of the United Arab Emirates, for instance, has recently announced intentions to issue the bond.
The British sukuk is stock exchange listed and tradable for investors. The bond is based on the most common sukuk principles with rent paid on property providing income for investors rather than interest paid.
Chancellor of the Exchequer George Osborne said: “The British government has always had a mind to create a Western hub for Islamic finance, and issuing the sukuk shows how determined we are to do so and that the City can adapt to meet the needs of a sukuk.
“Demand has been massive and gives a good return for investors and British taxpayers. As a result, we would like to see private financial organisations in Britain stepping up to deliver their own sukuks to boost the market.
“Once other financial organisations take part, the City will truly become a global hub for Islamic finance and now there is no reason for this not to happen.”
Besides Dubai, other Islamic nations looking to issue sukuks include Kenya, Malaysia and Pakistan.
Senegal became the first West African country to issue a sukuk on June 24, 2014 – and $100m was subscribed out of the $200 million offering within hours.