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CIPFA, the Chartered Institute of Public Finance and Accountancy, has announced today that they are examining how local authorities and other public bodies could make use of Islamic finance as a source of borrowing. CIPFA believes that local authorities and public bodies should explore potential borrowing options in order to diversify the funding options available to them.
The move comes after CIPFA held a round-table event last week to assess the use of Islamic finance with a broad range of stakeholders from local government, the banking sector, specialist Islamic finance legal advisers and a Sharia scholar. The roundtable discussed the features and benefits of Islamic financial products and examined how viable solutions could be developed as a source of local government funding.
After the roundtable CIPFA has now committed to facilitate work with Islamic finance providers to explore products which could be tailored to meet the needs of local authorities and other public bodies.
This initiative comes after the Government launched the UK’s first sovereign Sukuk bond in June 2014, worth £200 million, in a bid to establish the UK as a global hub for Islamic finance. The issue was more than ten times over-subscribed demonstrating the appetite for Islamic finance products in the UK.
Alan Edwards, CIPFA’s Strategy and Development Director said:
“Islamic finance is a growing source of funding around the world. CIPFA is committed to ensuring UK local authorities and public bodies get the chance to explore all funding options. Islamic finance may become an ethical and reliable source of funding.”
Commenting on the meetings, Luke Webster Director of Finance, at the London Pensions Fund Authority and Group Treasury Manager, Greater London Authority said:
“Intuitively there should be a role for Islamic finance in local government. The key will be structuring Islamic finance products that can meet our needs with competitive pricing.”
CIPFA held its first Islamic finance round table on Monday 20 October.
The event was chaired by Alan Edwards, CIPFA’s Strategy and Development Director and posed the question on whether there is a role for Islamic finance in the funding mix for the public sector.
In March last year, 74% of local government’s long term borrowing was with the PWLB with outstanding debt totalling £69.2 billion. Although offering completive rates and ready access, PWLB borrowing can be inflexible due to the significant penalties for early repayments.
Islamic finance for local government could provide an additional source of funding offering greater flexibility when it comes to structuring debt.
Attendees at the round table included representatives from CIPFA, HM Treasury, a range of local authorities, banks and law firms involved in Islamic finance as well as an Islamic scholar.
The Islamic principle surrounding the preservation of wealth provides the foundation for Islamic finance. It prohibits taking wealth falsely, for example, through cheating or lack of transparency. Another prohibited action is the charging of interest. The general Islamic finance framework also prohibits hoarding and requires that trade is responsible and useful. Excessive uncertainty is not allowed, nor is speculation or gambling. Sharia law also prevents Islamic investment in areas which are not for the well-being of the community, for example, in tobacco or armaments. Typically Islamic banks have a number of different products, including asset based or asset backed bonds.