Farmida Bi, partner, Norton Rose
Corporates should explore the Islamic finance route
11 October 2010
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While the first UK corporate sukuk, issued on behalf of International Innovative Technologies, may have been relatively small in terms of volume, it is hoped that its effect on the Islamic finance market in the UK will be significant.
The transaction utilised the sukuk al-musharaka structure and raised $10m (£6.3m) for the Gateshead- based technology development company.
The Accounting and Auditing Organisation for Islamic Financial Institutions defines sukuk as being “certificates of equal value representing undivided shares in the ownership of tangible assets, usufructs and services or (in the ownership of) the assets of particular projects or special investment activity”. There are a number of structures that can be used to generate the revenue paid to sukuk holders, generally categorised as being either asset-based or asset-backed structures. In asset-based structures, sukuk holders rely for repayment on the company seeking to raise finance, in the same way as a conventional corporate bond issue. In asset-backed structures, sukuk holders rely on the assets of the sukuk for security.
The size of this sukuk is significant because it shows that sukuk can be used for small, equity-like transactions as well as for jumbo-sized financing, such as the $3.5bn sukuk issued by Dubai Ports to partially fund the acquisition of P&O.
A number of reasons have been cited for why there have been no UK corporate sukuk prior to this, including the fact that the legislative and regulatory framework in the UK did not provide an efficient environment for sukuk issuances. In recent years, however, the UK government has tried to create a level playing field for Sharia-compliant financing as part of a broader scheme to promote London as the western hub for Islamic finance.
Since 2003, a series of finance acts have removed some of the tax barriers that made Islamic products less tax efficient than other conventional finance products. The UK government also passed further measures in the Finance Act 2009, including relief from stamp duty land tax in connection with the issue of alternative finance investment bonds (AFIB) - a definition that includes sukuk - and relief from capital gains tax in respect of transfers of land to and from sukuk issuance vehicles.
In February this year the Financial Services and Markets Act 2000 Order 2010 was introduced to remove any further barriers and uncertainty in the regulation of AFIBs. The order explicitly exempts AFIBs from collective investment scheme regulations, which should, according to the Treasury, reduce compliance and legal costs for such instruments.
Given the legislative changes and the fact that a UK corporate has now raised finance through sukuk, there could be a spate of new sukuk issuances in the UK. As a result of the current economic climate, which has resulted in some UK firms struggling to gain access to conventional forms of finance, sukuk can offer a viable (and now proven) alternative for domestic companies.
t is one of the ways in which cash-rich investors who are required to comply with Sharia financing principles, can invest in companies in the UK.
Although sukuk issuances have declined in recent years, reflecting the state of the capital markets in general, the global sukuk market equalled $46.65bn at its peak in 2007. It is expected that the Islamic capital markets will revive quickly once confidence returns.
While sukuk issuers have traditionally been based in the Gulf Cooperation Council (GCC) countries and in South East Asia, there is no reason why, given that a UK corporate has now set the
precedent, other companies should not use sukuk as a method of financing.
Norton Rose associate Hamed Afzal assisted with this article.