Earlier this month, the Treasury published the results of its consultation paper on a sovereign issuance of shariah-compliant debt. But legal reaction has been mixed.
"Some in the industry think that the government may be dragging its feet on this," said Mohaimin Chowdhury, head of legal, shariah and compliance at European Islamic Investment Bank. "They've raised legitimate issues but they could deal with them quicker. However, we also recognise that it is important for issues to be dealt with properly."
The government wants to issue a bill-like sukuk, with a maturity on one to six months, as part of a rolling programme worth up to £2 billion ($3.98 billion). The sukuk will be based on ijara contracts which have been widely accepted as shariah-compliant.
Doubts have been raised, by the Accounting and Auditing Organisation for Islamic Financial Institutions (Aaoifi) for example, about the compliance of structures backed by musharakah and mubarada.
But although the government has avoided these structuring pitfalls, it has run into other problems.
VAT could make an ijara sukuk unattractive as the tax could apply to the rental payments that sukuk holders receive. And because VAT is agreed at a European level, the government will have to negotiate with the EU to resolve this.
Closer to home, the Financial Services Authority needs to reconsider its regulatory treatment of sukuk. Sukuk are categorised as collective investment schemes and, as such, have to be authorised by the FSA. They may need to be treated like conventional bonds if the government's sukuk is to attract investors.
The government also needs to choose a shariah board. While it could use that of the mandated lead arranger, the Treasury would gain more credibility by forming its own shariah board. But this would create problems – and undermine UK expertise on Islamic finance – if the sovereign sukuk were declared incompliant by other scholars.
The bill-like sukuk will however solve one problem that Islamic banks face – liquidity. At the moment, the banks rely on interbank murabaha which are not suitable for short-term liquidity management. A sovereign sukuk would provide a more useful alternative.
The question remaining is how quickly the government can overcome the problems facing its sukuk.
"The sukuk is unlikely this year," said Chowdhury. "In addition to structuring issues, although the government hasn't said as much, the global economic climate maybe a factor and they will want to watch which way the markets go. We're hoping the sukuk will be issued early next year."
