Sukuk outside the Muslim world: UK, Hong Kong, and Luxembourg

In-Depth Analysis

The issuance of sovereign Sukuk by non-Muslim-majority countries represents one of the most significant developments in the mainstreaming of Islamic finance. The United Kingdom, Hong Kong, and Luxembourg have each issued sovereign Sukuk, demonstrating that the instrument is not limited to Muslim-majority jurisdictions and can serve as a strategic tool for attracting Islamic investment flows. The United Kingdom became the first non-Muslim-majority sovereign to issue a Sukuk in June 2014, with a £200 million ($340 million) five-year issuance. The UK Sukuk was structured as an Ijarah, with the rental income derived from three government-owned properties in central London that were sold to and leased back from the SPV. The issuance was heavily oversubscribed, with demand exceeding £2 billion — more than 10 times the issuance amount — demonstrating the enormous pent-up demand from Islamic investors for high-grade sovereign Sukuk from developed markets. The UK's decision to issue a sovereign Sukuk was driven by its ambition to position London as the Western hub for Islamic finance. Then-Prime Minister David Cameron announced the initiative at the World Islamic Economic Forum in London in 2013, and the issuance was part of a broader strategy that included regulatory reforms to accommodate Sukuk within the UK tax framework, the establishment of the first Islamic bank in the EU (Al Rayan Bank), and the listing of Sukuk on the London Stock Exchange. Hong Kong followed the UK in September 2014, issuing a $1 billion five-year Ijarah Sukuk. This was a significant move for the territory, which was seeking to position itself as a gateway between Middle Eastern Islamic capital and Asian investment opportunities. The Hong Kong Sukuk used government-owned real estate as the underlying asset and was listed on the Hong Kong Stock Exchange and Nasdaq Dubai. Luxembourg issued a €200 million five-year Ijarah Sukuk in October 2014, becoming the first AAA-rated sovereign to issue a Sukuk. Luxembourg's issuance was driven by its strategy to attract Islamic fund management and Sukuk listing business. The Luxembourg Stock Exchange has become one of the leading venues for Sukuk listings globally. These issuances, while modest in size relative to these countries' conventional debt programs, had an outsized impact on the perception and development of Islamic finance globally. They demonstrated that Sukuk could be structured within Western legal frameworks, that non-Muslim governments could identify suitable underlying assets, and that the instrument could attract significant investor interest beyond the traditional Islamic finance market.