EUROPE - FRANCE - The Time is Now

There are growing calls from the industry for US and European politicians to ditch their skeptical line on Islamic finance and deploy sovereign Sukuk as a way out of a conventional debt-induced nightmare.

After months of deteriorating economic news, confidence in western government debt has collapsed and nervousness prevails in financial markets.

But a groundswell of opinion within the Islamic finance industry believes the moment has arrived for sovereign Sukuk to flourish. And France it seems, with its colonial ties to North and sub-Saharan Africa plus the Levant, has emerged as a front-runner. (source)

Adopting asset-backed Sukuk structures restricting borrowing beyond a specific project would eradicate the political and economic imprecisions that frame conventional bonds, according to Omar Shaikh, a board member of the UK's Islamic Finance Council.

"If you need $3bn for infrastructure then you can only borrow that much. What you can't do is to borrow $4bn and use the additional $1bn to fund subsidies or pay for tax cuts to promote your electoral ratings," said Shaikh.

He said it could herald much-needed responsible borrowing at a time when western leaders are facing flak for mishandling public finances and playing "political volleyball" with government debt.

"The Sukuk market could present a useful complementary bond class for governments to allay current investor fears and capture new investors from the Islamic finance sector," Shaikh added.

In Europe, there has been no significant government, or quasi-government Sukuk issue, bar a €100m ($145m) issue by the German state of Saxony-Anhalt in 2004. The Islamic Globe has previously reported on how earlier this year, the UK government scrapped plans for a sovereign Sukuk as it deemed that an issue would not represent  "value for money", and while Luxembourg and Germany have flirted with the idea, neither has taken the plunge.

David Testa, MD of David Testa Consulting thought that France was now the only realistic option for getting the concept off the ground. "A high quality European sovereign Sukuk would work well at the moment, but it's limited to the UK, France and Germany. Out of these, France is the best bet. It's a chance for France to take a leadership position in the industry," Testa commented.

Adding: "France has historic connections with North and sub-Saharan Africa as well as the Levant where there are significant populations of Muslim, and where France still has important relationships."

However, the blockage is political in fiercely secular France, but there are plans afoot to 'brand' Islamic banking as something that doesn't use the word 'Islam' in its title, as well as representing Sukuk as a lease, not a debt instrument to skirt religious sensitivities and make it look like the government isn't just printing more money by issuing debt.

Many Shari'ah scholars don't regard Islamic bonds as debt in the traditional sense because Sukuk are tied to revenue-generating assets, which are used as a backstop if revenue stops.

Yusuf Talal de Lorenzo, an independent Shari'ah scholar, said western economies would be in essence issuing "asset-based investment certificates", not debt.

He added from a geo-political perspective "nothing could be better at this present time" for western leaders' efforts to reach out to Muslim states.

But Tarek el-Diwany, a senior consultant for London-based Islamic financial consultancy Zest Advisory, said although sovereign Sukuk limits the state's ability to take on debt, "at the end of the day it's still a debt instrument. The solution to debt is not more debt.  Something much more radical is required. Basically we need to change the debt-based financial paradigm that's got us into this mess," he said.

Meanwhile, pricing concerns persist around sovereign Sukuk, with many warning that the start-up costs - Shari'ah boards, extra auditing fees and regulations - could deter governments.

Brian Kettell, course director for the Centre for Islamic Banking and Finance Training, said compared to gilts the pricing of Sukuk in the capital markets is still too high.

"For UK or US sovereign conventional bonds you'd be looking at Libor minus, but Sukuk is Libor plus. With the euro collapsing it's not Libor minus for those countries anymore, so if you add the currency risk on top of the Shari'ah compliant costs it makes it even more expensive," claims Kettell.

As US President Barack Obama enters the race for re-election and Europeans attack their leaders, in some cases physically as Italy's Silvio Berlosconi knows, convincing non-Muslim countries that Islamic bonds are the answer might be a tough call.

Mark Smyth, managing director of Amanie Advisors in Luxembourg, said politicians face a strategic question over whether it's worth the extra costs and more importantly "political capital" if the Sukuk is likely to be a one-time thing.

For western governments that give Islamic finance the green light, it's a chance to set a risk benchmark and get a yield curve up and running on sovereign Sukuk at the AAA level. It seems there is a window of opportunity for success if Shari'ah compliant instruments are viewed as a long-term play to setup and develop the Islamic finance market.

Source : http://www.zawya.com/story.cfm/sidZAWYA20110827090358  - Aug 27, 2011