Al Rayan Bank issues largest ever Sterling Sukuk

Al Rayan Bank issues largest ever Sharia-compliant bond

The UK’s largest Islamic bank has become the first in the world to issue a public Sukuk (Islamic bond) in a non-Muslim country.

Known as Tolkien Funding Sukuk No.1, this is Al Rayan’s first sharia-compliant mortgage-backed bond.

The transaction is secured against a portfolio of prime UK owner-occupied Home Purchase Plans ("HPPs") originated by Al Rayan Bank.

The £250million Sterling-denominated Sukuk has an expected weighted average life of 3 years.

The announcement comes as the UK continues to position itself as a European hub for Islamic finance with the British government raising £200m in 2014, in what was the first sovereign Sukuk outside the Islamic world.

Birmingham-headquartered Al Rayan’s is the first UK lender to combine sharia-compliant financing with securitisation, meaning that the bonds are raised against assets, in this case, mortgages.

The reason for this is that Sharia-compliant financing prohibits money lenders from charging interest on their loans.

Instead, the lender agrees to invest in a project and then takes a share of the profits.

This means that Al Rayan is essentially offering customers the Sharia equivalent of a mortgage but, instead of making interest on the loan, the bank part owns the home and rents out the rest of it to the customer.

At £250m, this is the largest ever Sterling denominated Sukuk issued by a UK entity.

The innovative Sukuk has seen substantial interest with the initial release oversubscribed by 155%, reflecting strong demand for Islamic financing instruments in the market.

This move positions Al Rayan and the UK as the destination for the issuances of Sukuk in Western Europe.

Demand from investors has also been significant, with European RMBS investors and conventional and Islamic banks and pension funds all represented in the final allocation.

Commenting on the successful issuance Sultan Choudhury OBE, CEO, Al Rayan Bank, said: “The issuance of this groundbreaking Sukuk is a major landmark in the history of Al Rayan Bank, but it is also a significant development for the global Islamic finance sector which reinforces the UK’s position as a global hub for Islamic banking.

“Tolkien Sukuk has been designed to ensure that it is recognisable as High Quality Liquid Assets (HQLA) and as a securitisation under CRD definitions; this has resulted in high levels of demand from conventional institutions as well as from Islamic investors.”

Proceeds raised from the Sukuk issuance will be used by Al Rayan Bank to fund further growth in its asset book, which has increased by more than 23% over the last 12 months.

The issuance follows Al Rayan Bank’s announcement in November 2017 that it had become the first Islamic Bank in the UK to receive an official credit rating.

Al Rayan Bank has been a pioneer of British Islamic banking since it was founded in 2004 and has experienced unprecedented growth in recent years.