RPT-UK government rules out Islamic debt - Chancellor

LONDON Nov 24 (Reuters) - The UK government has ruled out issuing Islamic compliant debt, or Sukuk, but said it will legislate to help develop Islamic corporate debt.

The pre-budget report delivered on Monday by Chancellor Alistair Darling put an end to the prospect of achieve the issuance. [ID:nLO6260]

The government was expected in Islamic finance circles to eventually approve Britain's first Islamic debt instrument.

The Sukuk market has reached $111.9 billion in the eight years to 2008 and a further $69 billion is expected to be issued in 2008/2009, the International Islamic Financial Market said.

Western countries represent 50 percent of the Sukuk market the IIFM estimated.

Sukuk issuance including sovereign and corporate issues avoids the payment and receipt of interest.

"We have decided that at this time it would not be viable to do it. It would not offer value for money at the present but we will keep the situation under review," a spokesman for the Treasury told Reuters.

So far only the German state of Saxony-Anhalt in Europe has issued a sovereign Sukuk in 2004, launching a 100 million euros ($125.9 million) debt programme.

The UK government had mentioned the possibility of issuing sovereign Sukuk in the pre-budget report 2007, launching a consultation afterwards.

In response to that consultation, it said in June that about 2 billion pounds ($2.98 billion) of Sukuk debt would be achievable over time. It had intimated a preference for Sukuk treasury bills rather than bonds.

The scheme was part of government plans to make London an international Islamic finance centre.

Five Islamic banks and one insurance company have been established with authorisation by the Financial Services Authority (FSA).

While not issuing Sukuks itself, the government will support corporate their issuance in the Finance Act 2009, the Treasury spokesman told Reuters.

"We will legislate to remove stamp duty land tax barriers on Sukuks," the spokesman said.

This move would change the tax structure applied to Sukuk issuance backed by UK properties.

Currently a company issues a Sukuk by selling the building to a special purpose vehicle, leasing the property for the maturity of the bond and buying it back.

Under this structure the company issuing Sukuks is liable to tax when it sells the property and when it buys it back.

Mohammed Amin, partner and Islamic finance head at PricewaterhouseCoopers, called Monday's move "disappointing".

"This decision could make it easier for other western countries to catch up with the UK as centres for Islamic finance, attracting banks that might otherwise have set up in the UK," he said. (Reporting by Cecilia Valente; Editing by Andrew Macdonald)