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UK backing for Islamic bonds just starting with Emirates deal

[DUBAI] Britain is stepping up its commitment to expanding its role in the booming global industry for Islamic finance.

UK Export Finance, the government's export-credit body that is backing a proposed sale of Shariah-compliant bonds by Emirates airline, plans to extend guarantees to other industries, according to Hugo Swire, minister of state at the UK's Foreign and Commonwealth Office. Emirates is planning to raise about US$1 billion from its first sale of so-called sukuk in two years, two people with knowledge of the matter said on Feb 19.

The market showed a "high level of interest" in Emirates' plan, Swire, who became Britain's minister with responsibility for Islamic finance after the departure of Baroness Sayeeda Warsi in August, said in e-mailed comments from London on March 12. "UKEF expects to incorporate the sukuk guarantee into its standard product range so that it's available for future transactions in other sectors." The guarantee from the U.K., rated Aa1 at Moody's Investors Service, for unrated Emirates underlines the country's commitment to developing its role in Islamic finance, whose assets have almost doubled to US$1.8 trillion in the past five years. Britain became the first non-Muslim nation to sell a sovereign Shariah-compliant bond when it issued a 200 million- pound sukuk in June, which has since been followed by offerings by South Africa, Hong Kong and Luxembourg.

The UK sold sukuk due July 2019 at a profit rate of 2.036 per cent, receiving orders worth more than 10 times the amount raised. The yield on the debt dropped three basis points this year to 1.12 per cent on March 13. The government is "fully committed" to Islamic finance as a source of funding, according to Swire.

"We're trying to get accurate information into the market about the features of sukuk issues so that people can make an informed choice," he said. "As people become more familiar with these products, and decide that they work for them, we will see more issues of sukuk." The Bank of England plans a feasibility study this year for a Shariah-compliant liquidity facility for the country's lenders, and the government has set up a Global Islamic Finance and Investment Group "to help professionals in this field bring the market to maturity," Swire said.

The UK has at least five fully Shariah-compliant banks and more than 20 other institutions offering Islamic products, according to government data.

About US$1.8 trillion in assets are held by Islamic financial institutions worldwide, according to the Standard & Poor's Islamic Finance Outlook 2015, which was published in September, from about US$1 trillion five years ago.

The rate of growth hasn't lured the UK to sell sukuk again. All the debut sovereign issuers that entered the market last year, including Britain, have said they have no immediate plans to issue. Luxembourg said it wants to sell its second Shariah-compliant instrument in 2016.

Emirates hired Citigroup Inc, HSBC Holdings Plc, JPMorgan Chase & Co and National Bank of Abu Dhabi PJSC to arrange the UKEF-backed bond sale, a person with knowledge of the matter said last week. A company spokeswoman declined to comment by phone on Sunday.

The airline last sold sukuk in March 2013. The yield on the US$1 billion of notes due 2023 fell 13 basis points this year to 3.79 per cent on March 13, according to data compiled by Bloomberg. That matches the drop to 4.2 per cent in the average rate of sukuk in the Middle East, according to JPMorgan indexes.

"UKEF-wrapped sukuk represents such a good fit with the needs of customers for UK exports and expectations of the market," Swire said. "Islamic structures can have an ongoing role to play in financing UK exports, as well as offer further opportunities for investors to buy high-quality Shariah- compliant assets supported by the British government."