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UK government set to issue Islamic bonds

Laurie Noble | Stone | Getty Images

Britain is set to become the first non-Muslim country to issue an Islamic bond, under plans unveiled by Prime Minister David Cameron on Tuesday.

Cameron said the U.K. Treasury hoped to issue a bond-like "Sukuk" worth around £200 million ($322 million) in 2014.

Sukuk is a form of debt that complies with Islamic financial law, which forbids interest-bearing bonds. Instead, a Sukuk pays investors a share in the returns generated by an underlying asset, such as property.

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Islamic finance is growing 50 percent faster than traditional banking, according to Britain's Treasury, with global Islamic investments set to grow to £1.3 trillion by 2014. A number of British banks are already active in the Sukuk market, and there have been 49 Sukuk listings on the London Stock Exchange — valued at $34 billion — over the last 5 years.

Speaking at the World Islamic Economic Forum in London — the first held in a Western country — Cameron said that although there had been much talk of creating this type of bond outside the Islamic world, "it's just never quite happened."

"Changing that is a question of pragmatism and political will. And here in Britain we've got both," he said. "This government wants Britain to become the first Western sovereign to issue an Islamic bond."

The U.K. government's wooing of Islamic investors follows a trip to China, where U.K. finance minister George Osborne launched a charm offensive to capture investment and business. Initiatives announced on the China trip included measures to allow Chinese banks to set up branches in the City of London and several major infrastructure projects including financing for a new nuclear power station in west England.

(Read more: China charm offensive may not bring back UK investment)

The bonds will support the expansion of Islamic banking in the U.K., Osborne wrote in the Financial Times on Tuesday, and provide economic benefits for both Muslims and non-Muslims.

He added: "The government's Islamic bonds issue will act as a catalyst for corporate institutions to follow suit — further expanding the use of Sukuk as an asset class in the global capital markets, and helping to promote more needed overseas investment in Britain's infrastructure."

London is already the biggest center for Islamic finance outside of the Muslim world, and Cameron said he wanted it to go "further still."

"I don't just want London to be a great capital of Islamic finance in the Western world, I want London to stand alongside Dubai as one of the great capitals of Islamic finance anywhere in the world," he said.

(Read more: Dubai, Abu Dhabi exchanges could merge by year-end)

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