First European Islamic bond issued

ITT sukuk listed on the Cayman Islands Stock Exchange

A UK manufacturer has raised $10
million through a sukuk, making it the first company in Europe to use the
Islamic financing technique to attract investors that can only invest in
Sharia-compliant instruments.

The industrial milling machines
producer International Innovative Technologies raised the funds in a private
equity-like transaction to fund product development.

The sukuk, a certificate of
ownership that, unlike a traditional bond, also has equity characteristics,
will be listed on the Cayman Islands Stock Exchange and pay 10 per cent per
annum until it expires in 2014.

The sukuk uses a musharaka structure
which provides that the parties contributing capital to the venture share
profits and losses according to a prearranged ratio and enables the sole
investor Dubai-based Millenium Private Equity Ltd to invest into IIT.

According to IIT’s legal adviser
Norton Rose, the structure is not unusual and other firms could attract Islamic
investors by using Sharia-compliant financing techniques.

Earlier this year the UK made it
less costly and easier to issue sukuks with the Financial Services and Markets
Act 2000 Order 2010.

The tax and legislative framework
in the UK is generally regarded as the most Islamic finance-friendly in Europe,
but so far the market had only seen the listing of foreign issuer Islamic
bonds. ITT became the first European company to tap into the market.

The transaction showed that not
only could such instruments be applied in the UK, but also provides local firms
with access to a whole new group of investors.

However, the transaction comes only
a month after a failed sukuk placement by UK travel company Thomas Cook in
July, partly because the yield of 7 per cent was regarded as too low by
investors.

As in Islam, the lending of money
itself and the charging of interest or riba is prohibited, Islamic financing
methods either include specific service charges or take the form of
investments, in which the financier takes on the role of investor in the
business venture, instead of lender.  The
extension of funds is similar to equity financing and any profit made by the
financier is the compensation for the risks shared. At the same time, any business
losses will translate into investment losses. As a result, Islamic financing
structures are often based on underlying assets backing a transaction, as in
ITT’s case the business venture.

Because these assets are often less
liquid than traditional bonds, the Islamic bond sector has been hit after the
financial crisis.

A fast-growing market before the
credit crunch, global sukuk issuance accounted for $13.7bn in the first half of
2010. Although this was almost double the issuance of the first half of 2009,
issuance remains limited to the Middle East and Asia, and specifically
Malaysia, Saudi Arabia and the United Arab Emirates, according to data provider
Dealogic.

BIZislamSTORY

A large number of Cayman-registered companies are listed on the Hong Kong Stock Exchange.
Photo: File
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