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Credit crunch blow to UK Islamic property loan market

It had been expected in Islamic finance circles that the government would approve Britain's first Islamic debt instrument to meet the growth of Islamic finance in the country and the rising demand for Islamic mortgages.

The Sukuk market has reached £50 billion in the last eight years and London has established itself as a major international finance centre.

Western countries represent 50% of the Sukuk market. Interest in Islamic finance including mortgages, have soared as 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 said.

So far only the German state of Saxony-Anhalt in Europe has issued a sovereign Sukuk with a €100 million debt programme.

The UK government had mentioned the possibility of issuing sovereign Sukuk in its pre-budget report 2007, launching a consultation afterwards. But now there are more pressing economic matters that need to be financed.

In response to that consultation, it said in June that about £2 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.

While not issuing Sukuks itself, the Treasury will support their issuance in the forthcoming Finance Act 2009. '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.