The UK’s mid-market sukuk industry is severely undersupplied, according to one of the country’s top Islamic bankers.
“There are simply not enough products to meet demand from international and Middle Eastern investors,” Scott Levy, CEO of Bedford Capital Row (BCR) told Arabian Business.
“This problem is investors want to access a broader range of products across a wider variety of issuers; local markets are saturated and there is a lot of dry powder to be invested internationally. Investors are looking for exposure across assets outside their region,” he added.
The London Stock Exchange has raised 68 sukuk issuances worth over $50 billion to date, but most of the ticket sizes are large which creates a funding vacuum in the lower-value tiers, said Levy.
“It’s quite clear that nowhere near enough has happened to facilitate new product launches,” said Levy. “Fundamentally, there is enough money slushing around and you just wonder why nobody is joining the dots.”
Specialised in Sharia-compliant debt issuance for SMEs, BCR was founded in 2015 with an ambitious vision to plug the Islamic finance gap. Sukuk bond issuance now comprises around 70 percent of the firm’s business, said Levy, pictured below.
“There are not enough products and this is why we are creating more products. The reality is that expertise for product innovation in the UK is poor. The big investment banks think that the sterling market is too small for this kind of market segment,” said Levy.
BCR expects to bill between $500 million and $1 billion in sukuk issuances in 2021, with at least 50 percent of the funds comprising of inward investment into the UK, primarily from the Middle East.
“We are seeing significant interest in sukuk as western investor appetite rapidly increases and firms issuing the debt look for broader market exposure,” said Levy.
“Raising funding for growing small and medium businesses is tough at the moment. Banks are hesitant and there remains a funding gap for companies looking for more than ‘crowdfunding’ levels of investment. At the same time, investors’ appetite for tax-efficient yield is undiminished,” he added.
In 2019, BCR issued the UK’s first corporate sukuk – a $50,000,000 seven-year issuance to provide expansion capital to NQ Minerals, a UK-listed mining business. The firm is working to raise SME issuances across a range of sectors including shipping, aviation, mining, property, financial services, alternative finance, ESG, and renewable energy.
In September this year, BCR issued a $50 million, three-year sukuk to finance the expansion of P1 Capital Ltd, a boutique asset-management group focusing on the UK property sector.
“We are actively getting investors into UK property assets through the sukuk channels,” Levy said. “It is an attractive market and we see great opportunities to increase the capital inflows to the UK property market.”
The CEO sees particular opportunity in the British social housing space. “As the demand for higher quality social housing increases in the UK, I expect to see one decent-sized sukuk transaction next year in the social housing space,” he said.
Short-term debt opportunity
Levy also sees vast opportunity in the short-term debt sukuk space as the ongoing pandemic raises the risk of sterling inflation.
BRC recently launched an 18-month inflation-linked sukuk, denominated in EUR, CHF, USD and GBP Insured Money Market Certificates (IMMC).
The IMMC is based on strict investment guidelines, incorporates insurance and credit enhancement, providing heightened risk mitigation. The transaction parameters of IMMC are based on a fixed price, fixed term and fixed return, providing additional certainty to investors.
“Investors are becoming more concerned about inflation with the amount of liquidity which has been pumped into the financial system. Our inflation-linked sukuk is a new way of looking at short-term inflation and will give investors looking for Sharia-compliant investments vital assurance,” said Christoph Kruecken, global head of business development and distribution for BRC.
According to Levy, the next 6-12 months will see BRC focused on Islamic liquidity management and short-term sukuk.
“The big problem for the banks in the UK is that they have no sukuk in sterling. Our short-dated sterling sukuk at least capital gets flowing and gets a return to the investors – this is a unique product in the market,” he said.
Levy said the risk of inflation for Islamic investors is “quite high”, given the current high levels of UK government spending.
“Our short-dated sterling Islamic Sukuk liquidity solution is an absolute must for the market. I’d be delighted to see competition and other people doing this as it will only help,” he said.
Levy said it is “highly likely” that cash values could begin to be eroded by Q1 2021.
“Post-coronavirus, there will be pressure on short-term lending for businesses and export and import – it’s going to get squeezed. This is a real thing that will happen from printing money,” he said.
Source Arabian Business