Wednesday, April 25, 2007

The UK Treasury is Right to Issue Sharia Bonds

When you need to raise $120 billion each year just to keep the government machine running, you need to tap into every possible source.

Hence the UK government is exploring ways in which to make UK government bonds (gilts) and Premium Bonds Sharia-compliant.

Sharia Law prohibits the charging of interest on a loan and gambling. Hence most Islamic bonds are issued as zero coupons at a deep discount to par. However, the net effect of this is merely to hide the interest.

Quite how the govt will get around the gambling issue with Sharia-Premium Bonds is hard to understand though. Holders of Premium Bonds accept a lower rate of return than the risk free rate (currently 5.25%) in return for a chance to win a big prize (each month a top prize of $2 million is paid out to one holder).

This is an understandable move by the government to broaden the appeal of gilts and ultimately to lower its cost of funding and to reduce the Public Sector Borrowing Requirement (PSBR).

LGF is unsurprisingly hitting the cultural suicide button. But this is way off the mark.