Mr. Hammond: To take the Minister back a moment, I have not been following the emergence of this market as closely as my hon. Friend the Member for Hammersmith and Fulham has, but she just said that one of motives of the Government was not that of attracting a different class of investor to UK Government securities. That surprises me. I had always assumed that one of the motives for looking at this initiative was the assumption that there was a class of potential investor, potential buyers of UK Government securities, who felt excluded from that market at present because of faith-based restrictions on the products they could be involved with. That could include domestically based investors as well as potential overseas buyers of UK Government paper. Why does she not regard that as a potentially beneficial avenue, a potentially beneficial source that could be tapped by this initiative?
Kitty Ussher: That is a very important point. As I said when I discussed the indirect effects that could be positive and affect the sharia-compliant retail market, it may be, for example, that a sharia-compliant bank, or a bank offering sharia-compliant current accounts or savings accounts to the British population might find it useful to have the whole investment chain sharia-compliant. In that sense, it will attract a different type of investor. I was thinking more of whether we are trying to tap funds from the middle east and extremely wealthy people who want to invest in sharia-compliant securities. I would be delighted if they wanted to invest in UK plc and they would be welcome to do so, but our research suggests that a slightly higher return is required to guarantee that we would attract that type of investor and we do not think it is in the UK taxpayers interests to arrange a product specifically to provide that kind of return. Of course, there is nothing in a sharia-compliant sovereign issue that implies that one has to be a sharia-compliant investor in order to buy it; we did not think it would work because, if we had to offer a higher return in order to attract some of the individuals I just referred to, everybody would want it and so there would be distribution problems.
The most important point is that we aim to ensure that when these products are launched on the market, as far as the end user is concerned, they look the same as any other T-bill. They are obviously structured in a very different way, but we hope to structure it in the least complicated way so that the sukuk, to the end user, does not look any different in risk from a conventional T-bill. That is why we are not going to go for extremely complicated products. I should clarify what I mean by uncharted waters. We are in uncharted waters because we have not done a sukuk sovereign issue before, but the actual products we intend to launch, if we decided to proceed down this route are not uncharted waters at allwe are proposing a plain-vanilla ijara structure of
Mr. Hands: I wish I could share the Ministers confidence that she will avoid banks trying to take out too large a margin from these transactions. The language she is using highlights the dangers here. She was talking about how the bills would look conventional. That is what has happened in the past: people have bought into products where the issuer was a triple-A rated Government. Denominated in their own currency, they looked as safe as houses, but turned out to be anything but. The Minister talked about easily tradable securities. The Government expected a rolling market of about £2 billion in principle of those securities. One of the answers to their consultation said that in order to guarantee a liquid issue, they would need a principle probably in excess of £1 billion. Is she envisaging a large number of pieces of £25 or £50 million, or does she envisaging one or two big benchmark issues of £1 billion? That will make an enormous amount of difference to the likely success of the measure, and especiallyto return to a point that I madeto the reputation of the UK as a borrower.
Kitty Ussher: I cannot give an indication, because we have not decided. We are holding a consultation about the nature of a programme of issuance. We think that it would be about £2 billion in total. We want to make sure it is as successful as possible, and we are taking advice on these points. We have not decided whether to proceed, but all those points will become clear if and when we do so.
Mr. Bone: The Minister is working hard to explain the Governments position, but there are many ifs and buts, and a great deal of uncharted water. She has said: We have not made a decision on that; we are delegating it to regulations and we will bring it in when we think it is in the national interest. Would it be better not to introduce anything at this stage, and come back next year when Ministers have made a decision? The measure could be debated in Parliament before we go into action. It is not clear why there is a rush to do this now, in such a confusing way.
Kitty Ussher: I am sorry if the hon. Gentleman thinks that I am confusing him. I am attempting to create some clarity and light amid some rather large questions that were raised this morning, and I will do so for as long as it takes. We thought it was simply sensible government to take the power in this years Finance Bill. Obviously, if we decide not to proceed with a Government sukuk issuance, that power will not be used. We have not yet decided whether to proceed; we
Mr. Bone: I was not trying to imply that the Minister was confusing; I was just saying that the legislation is confusing. I understand that, if the measure is put into practice, it will go through the affirmative statutory instrument process. The problem with that is that we cannot amend it: we have to accept or reject it. That is one of the disadvantages of not doing this through primary legislation.
Kitty Ussher: If the hon. Gentleman thinks, either at this stage, or at that later stage, that we are not doing the right thing for Britain, he is within his rights to reject it. I must say, however, that given that the Debt Management Office routinely issues Treasury bills, on a minute-by-minute basisthat is a completely standard procedurethe idea that we have to debate every single change on the Floor of the House in great detail, together with the ability to amend the measure, could be destabilising. We think that we have done it right: we are having a debate now, and if we decide to proceed, the regulations will be laid according to the affirmative procedure. We are consulting in the open as fully as we possibly can.
Kitty Ussher: I am conscious of the fact that I have an enormous number of questions to answer, so I will give way to the hon. Gentleman, then move on to another question.
Mr. Hoban: The Minister referred to the importance of the issuance for the development of the retail market in the UK. What assessment has she made of the appetite for a £2 billion issuance? Are there enough savings in the UK market to absorb bills of that extent, or does she expect that some of these bills will be sold to overseas investors?
Kitty Ussher: We do not mind who buys Treasury bills. We do not think that there will be any lack of appetite for them, compared with other products. One reason why we decided to proceed with a consultation on T-bills, rather than larger gilts, is that we believe that they will be even more liquid, and that demand is extremely well established. I do not know whether that answers the hon. Gentlemans question.
Kitty Ussher: I feel as if I am going up and down like a yo-yo. I will give way to the hon. Gentleman one last time, and then I will make progress.
Mr. Hoban: The Minister has not answered my question. What I seek to understand is what appetite there is among existing UK-based Islamic retail financial organisations for an issuance of about £2 billion. Is there £100 million in savings out there to be invested in the bills, or is it £2 billion, £3 billion or £4 billion?
Kitty Ussher: It is entirely up to those institutions whether they wish to purchase Government Treasury bills and invest in them. We have not taken the £2 billion and disaggregated it; it is entirely up to the market, which is extremely liquid. We have examined the amount of issuance required to achieve sufficient liquidity to ensure that the bills can be traded easily, as well as demand among investors, which is how we came up with the figure £2 billion, but it would not be right to set a target for the proportion that should come from Islamic retail institutions as opposed to the broader investor base which, thankfully, would happily invest in a large number of Government securities whether they were sharia-compliant or not. [Interruption.] I am going to make progress.
I was asked about foreign currency issuance. It is right that we have taken powers to make payment in foreign currency, but we have no intention of issuing any sukuk not denominated in sterling. We are taking the power more broadly, simply to mirror the provision in the National Loans Act 1968 that gives the Treasury the power to borrow in foreign currency. To put it in context, the Treasury issued a five-year US dollar bond in 2003, but it has not issued bonds denominated in a foreign currency since then, and we have no intention of doing so in that area. It is simply a matter of legal consistency.
The original question posed at the beginning of this debate was how we would ensure sharia compliance. As our consultation document says, there are a number of ways for institutions to ensure the sharia compliance of similar securities. They can use a board of internationally recognised scholars appointed by a bank or other institution; their own board of internationally recognised scholars; or an internationally recognised Islamic standard-setting institution such as the Accounting and Auditing Organisation for Islamic Financial Institutions or the Islamic Financial Services Board.
We have not decided which of those that we will use, but it is obviously in our complete and manifold interest to ensure that the security, if and when we launch it in the market, is perceived as sharia compliant. We will take advice from legal firms and investment banks if we pursue that route on issuance. It is standard practice for advisory firms to approach sharia scholars on behalf of their client, which in this instance would be the Government. We will make our procedure entirely clear.
Mr. Hands: What happens if the underlying asset in the vehicle or company referred to in the schedule changes? Surely, that would prompt another assessment of sharia compliance. What would happen if the new assessment said that the bills were no longer sharia-compliant? Presumably, the market would tank and the UKs reputation as a borrower would again suffer a severe negative impact.
Kitty Ussher: I sometimes get the impression that the hon. Gentleman is trying to talk the measures down. I am not sure that that is in the national interest. I would be interested to know whether, if we solve the problems
On the issue of assets, there has been understandable uncertainty about who will own the asset in the ijara structure if we decide to issue a Government sukuk. The asset will remain on the Governments balance sheet, and we will keep full control over whatever asset it is. We are simply designing a legal construct that is sharia compliant. Ownership or control of the asset will not be passed over to anybody outside Government. It would not be in our interests to do so.
That point relates to some of our earlier discussions about risk. The measure involves risk sharing, in the sense that an asset is subdivided and used to launch Treasury bills in the market that are backed by that asset. We will not proceed if there is any additional risk. The risk will be exactly the same as that for any other sovereign security that is issued. The sharing comes from using a special purpose vehicle to securitise and subdivide the asset so that there is more than one holder. That is where the sharia-compliant sharing notion comes from. I hope that that answers the questions asked by Opposition Members.
The issue of a double charge for stamp duty land tax was raised. We are aware of that issue, and we announced in the Budget that we will address the problem in next years Finance Bill after consultation. The consultation document is due to be published on 26 June.
Mr. Hoban: If that issue, which is important in structuring the product, is to be addressed in next years Finance Bill, why can we not debate the measure in next years Finance Bill?
Kitty Ussher: Because we thought it sensible to take the power now. We wanted to demonstrate to the constituency with which we are working that we are serious about doing this. We also wanted to increase the opportunities for debate, which I would expect the hon. Gentleman to favour.
A point was raised about whether the Debt Management Office will swap the proceeds that it receives from any potential sukuk issuance. I have said that we will undertake only sterling issuance, so the question of swapping the proceeds back into sterling does not arise. I am advised that the issuance of a sukuk will not require the use of swaps or other derivatives. I hope that that reassures the hon. Member for Hammersmith and Fulham even further. While we are in uncharted waters with the possibility of the Government issuing a sukuk, it is not perceived as a complicated product by the end user.
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