Last week, Britain mandated five banks to arrange a 200 million pound ($336 million) sukuk issue, part of Prime Minister David Cameron's effort to protect London against competition from other sukuk hubs such as Luxembourg, Dublin, Dubai and Kuala Lumpur. The sukuk could be issued in coming weeks, subject to market conditions.
Britain's choice of HSBC, Qatar's Barwa Bank, Malaysia's CIMB, National Bank of Abu Dhabi and Standard Chartered big institutions with considerable marketing muscle as arrangers appeared designed to ensure easy distribution and tight pricing.
But the choice was notable for excluding all of Britain's six full-fledged Islamic banks; none was included in the mandate.
That could reduce the impact of the issue in developing expertise and depth in Britain's Islamic banking sector, the largest in Europe. It may also limit British banks' access to the issue, making it harder from them to use the sukuk to manage their liquidity.
The UK government's inaugural sukuk transaction is a good step forward as it will create a benchmark and open the market for other UK issuers, said Apostolos Bantis, emerging markets credit analyst at Commerzbank in London.
However, this particular issue is unlikely to have any major impact right away. There needs to be more frequent issuance and also participation of private banks and corporates to establish a sukuk market out of the UK.
British officials have previously indicated that the upcoming sukuk will probably be a one-off issue rather than the start of a regular issuance programme.
One of the major Islamic banks in Britain is Bank of London and the Middle East, Europe's largest stand-alone Islamic bank, which is building stronger links with the Gulf - last year it opened an office in Dubai and listed its shares on a Dubai bourse.
In February, BLME was one of the co-lead managers of a $1.5 billion sukuk issue from the Islamic Development Bank , the largest ever from the supranational lender.
Naturally we are disappointed that no UK Islamic bank has been selected as an arranger as this would be a further opportunity to champion the UK Islamic finance market, said chief executive Humphrey Percy.
British Treasury officials did not respond to Reuters requests for comment; the government said earlier the arranging banks were selected in an open and competitive process.
The appointment as arrangers of Barwa Bank, CIMB and National Bank of Abu Dhabi - which are significantly larger than Britain's Islamic banks - suggests a big portion of the issue will go to cash-rich Islamic investors in Qatar, the United Arab Emirates and southeast Asia, rather than Britain.
Islamic banks in Britain have lacked a wide range of highly rated, sharia-compliant, sterling-denominated instruments that can be used - and even traded - to manage their funds. Both BLME and European Islamic Investment Bank, another London-based institution, said they planned to buy the British sukuk on behalf of clients and for their own liquidity purposes.
This may be more difficult if much of the paper ends up parked in the Middle East and Asia, however.
It would be possible to allocate half of this to British Islamic banks, although I suspect allocation will be mostly outside the UK, said Harris Irfan, EIIB's managing director.
This will be primarily a buy-and-hold paper; given the relatively small size I cannot see it being highly traded.
The sukuk's structure looks likely to limit the extent to which the issue could be expanded if demand proves heavy. Britain will use an ijara structure, a sharia-compliant sale and lease-back contract, under which the rental income of three central government offices will underpin the transaction.