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Since co-founding Bedford Row Capital in the UK in 2016, Scott Levy and his team have established a number of market-firsts in a drive to democratise sukuk issuance globally.
His company, a multi-award-winning provider of global structured securities solutions, has executed more than 100 public transactions across all asset classes and sectors as diverse as trade finance, sukuk, liquidity management, central bank liquidity, and green bonds. Among these transactions was the issuance of the first sukuk for a European-listed corporate, and the launch of the first digital Mudarabah platform in partnership with the Bahrain Institute of Banking and Finance.
Combining data transparency, blockchain enablement, and a digitised sukuk issuance platform, Bedford Row Capital consistently ranks among the top 100 originators globally and has become one of the leading non-bank players in Islamic finance. And with offices in London, Estonia, Singapore the UAE and recently Australia and the USA, the company continues to expand its footprint globally.
From his office in London, Scott Levy, co-founder and CEO of Bedford Row Capital, spoke with Crescent Leaders about product gaps in the Islamic finance market, the lucrative but underserved corporate sukuk market, and the practical steps his company is taking to align shariah-compliant investing with impact investing.
At which point did you get into Islamic finance? What piqued your interest in this segment of the financial system?
I worked in the insurance industry for 18 years, starting in the early nineties. In 2008, I met a guy who was the appointed actuary for a takaful insurance company in Luxembourg. I didn’t know what Takaful was and I started exploring it.
The thing that got me interested was that he said before the global financial crisis, an issuer would issue a conventional bond in the market at around 6% because that’s what base rates were, but they would issue a shariah compliant bond at 0.25%. He said because people could only invest in shariah-compliant bonds, there was an arbitrage, and the issuers were able to arbitrage the market from a shariah-compliant side to get super cheap funding.
I was running a credit fund at the time and not surprisingly, that sparked my intellectual curiosity. I thought there was something inefficient about this market. I continued to keep an eye on developments in the shariah capital market. In 2015, I was invited to an Islamic finance conference, just before setting up Bedford Row Capital. I met a couple of people there and they were saying there weren’t enough issuers in the market; there was a definite shortage of products. And my business was about creating products.
How could there be such a situation, which was a fantastic arbitrage in 2008, and nothing had changed in seven years. But the reality was that nothing had changed in 30 years. It made no sense, we’ve got perfect capabilities in London, we’re the investment banking headquarters of the world, and yet there was no solution to this problem. So, when I set up Bedford Row Capital in 2016, one of my objectives was to address this problem of facilitating more issuance and do the things people talked about. Everything we do in structuring is about access.
In the six years since your launch, you’ve brought to market several green bonds and a green sukuk. How difficult has it been to structure a green sukuk versus a green bond?
The reality is there’s very little difference. Yes, we need a fatwa, slightly different transaction documents and to have risk sharing so that the nature of the transaction is different. But honestly, it’s paperwork, it isn’t actually that complicated to do one or the other. You need extra expertise but the actual effort once you acquire the expertise, is exactly the same. And that’s really the point of the business, to have to have structure, processes, technology, and expertise to make the process smoother.
What efforts are you making to bridge the gap and promote the natural alignment between Islamic and sustainable investing?
We have the first-ever corporate sukuk coming out of Bangladesh soon. Using this transaction as an example, we’ve created SDG conventional-looking documentation that sits alongside the shariah compliant one. The most important thing about bridging the gap is bringing conventional investors into Islamic finance, because ultimately, it’s about faith-based investing and ethical finance. These underlying principles are what shariah law is about. You can’t separate the two. But what separates them now is language.
We’ve adopted a term called delabelisation. Let’s roll back some of the technicalities of shariah-compliant terminology. We don’t need to call it “musharaka” or “Murabaha” and focus on the ecomics of the transactions. Let’s focus on the business, its impact, and its alignment with the SDGs to try to bring the two worlds closer.
In the UK, there are a few startups – fintech and alternative finance businesses – that now describe themselves as ethical investment platforms. Turkey is another good example; they call it participation banking. So, the idea of ethical transparency suits everybody. But there are not enough examples of that.
It’s not easy to market to a conventional investor a green sukuk, because they don’t know what a sukuk is. We have to be careful; at the end of the day. As long as you’re exposing the economics and impact, there’s no reason for us to keep creating the same barriers around technicalities.
You once said that through the Al Waseelah platform, you’re managing to review transactions from all over the world that only need an extra layer of structuring work to make them sukuk-compliant. Could you elaborate on this process?
I’ll give you two examples. With supply chain finance or trade finance, investment banks are pulling out. Those transactions by their very nature – the buying and selling of commodities – fit perfectly into a shariah-compliant structure. Interestingly, it’s also one of the biggest areas that have a product gap, which is on the liquidity management products.
Over the last 18 months we’ve had the Al Waseelah IMMC, which are Insured Money Market Certificates; short-dated liquidity management shariah-compliant products in euros, dollars, and sterling. And we’re the only people in the world that are doing this in euros and sterling. But that kind of natural alignment between trade and liquidity management came off the back of the Al Waseelah platform.
The other end of the spectrum is property investment. Everybody loves UK property. We did this about three years ago, effectively bridging for UK real estate developers in a shariah compliant transaction – invest in the property, split the profits, sell the property, and pay out the profits. It’s a perfectly shariah-compliant structure with a very acceptable asset class. We won awards for both of those two examples. We don’t have a lot of competition, but it would be nice if there was more because we’d see more products.
We’re now looking at aircraft financing, which is effectively an “ijara contract” because it’s an asset being used to generate cashflows. It fits very nicely into a shariah compliant format. Emirates and Air Arabia have done it. But we’re looking at cargo and business aircraft. Even things like private equity transactions – you buy an equity in accompany and then when a company sells you take a profit – is in its very nature shariah compliant. The question is what kind of companies.
We’re launching in September a portfolio of companies investing in hydrogen technology but in a private-equity, shariah-compliant format. Because investors need more things to invest in other than GCC real estate. It will be through Al Waseelah Platform, in dollars, euros, and sterling. We’re talking to distribution groups in Bahrain, Singapore, and the United States. The companies will all be listed. We’re not doing a private placement; we’re putting it in the stock market, and we’re giving a broader participation for a democratization of issuers, not retail investors. I’m not trying to sell it to the man on the street, I want more corporate issuers.
Tell us more about the first short-dated, inflation-linked sukuk that you launched in October 2020. How was the response and are you planning to roll out more sukuk of this kind?
We were in too early. Because in 2020 inflation wasn’t really on the agenda like it is now. But all of a sudden everything changed. We haven’t done one in recent months, but I expect we’ll pick it up again in the fourth quarter of this year. The inflation-linked products are essentially supply chain finance. The problem is how do you do a series of shariah-compliant transactions that respond to inflation. Well, you do it by buying and selling basic food products. Basic commodities are how you calculate inflation.
How common are inflation-linked sukuks in the market?
I haven’t seen one in the last few years. There are still inefficiencies in this market. If you’re a large corporate and you’re a well-known brand from the GCC, Indonesia, Malaysia, or any of the big liquidity markets, you can actually issue paper into that market at what would be otherwise be an uneconomic price. Because there are still not enough issuers. So, a big issuer coming to market doesn’t have to issue inflation-linked paper because they’ll get the business anyway. Right now, it’s a great time for those business to make super-big, long-dated products which actually are bad value for investors, but it’s happening.
Even on the green sukuk side, if I was an issuer, 2030 and 2040 targets are a great excuse for issuing an 18-year paper at a fixed price. It doesn’t make any economic sense but it’s selling. It’s an issuer’s market. But should we driven by economics or impact? That’s a tough one. To make an investment because it’s good for the future is a tough pill to swallow for shareholders.
Given that there are also no inflation-linked green bonds, as inflation continues to rise, do you think the fact a sukuk is inflation-protected could on its own encourage investors to move towards green sukuk?
I think anybody issuing inflation-linked paper will find buyers. From an investor’s perspective, it doesn’t matter whether it’s sukuk or conventional. Maybe it matters to shariah-compliant investors, but not if you’re a conventional investor. Any inflation-linked paper with a decent credibility behind it will be bought. But I haven’t seen one. Not yet.
Are there any new innovations in the sukuk market lately that are making it easier for issuers to adopt ESG/SDG principles?
The biggest problem with ESG is that they’re so poorly defined. To be able to deliver data around whatever you choose to define for ESG, you’re talking hundreds of data points that you could report to the market, not everybody’s going to do all of them. There are service providers who are trying to provide tools to help companies better report.
I have only seen one really cool application, which is a simple mobile app that is downloaded by the target market, who are garment factory workers in Bangladesh. At the end of every shift, they measure how happy they are. And that data is aggregated so that people who are buying garments produced by that factory can see how their workers are treated. It touches at ground level what’s happening. The company’s called ES3G. It’s not specifically shariah compliant, it just happens to be in Bangladesh.
What would be interesting would be to take that data, let the factory raise money and let’s say to our investors – if the number of happy workers drops, we will pay you more money because we need to make our workers happy. That kind of positive reinforcement transparency would be a great product.
Otherwise, it’s spreadsheets and it’s hard work. Every time this subject comes up in a conference or panel discussion, my view is that we’re looking at the wrong thing. If you want to make it easier, ESGs are not it; SDGs are actually much easier. Their logos are easy to understand. And they give you simple and quantitative numbers and a colourful way to connect with people. The SDGs have done a genius bit of packaging.
What is the ESG assessment process like when it’s conducted with a potential company for the purpose of a sukuk issuance?
We take SDGs not ESGs. The SDG assessment becomes a conversation around easily identifiable targets. A lot of the shariah-compliant potential issuers we’ve spoken to don’t think in terms of SDGs. They just treat their workforce well anyway. They don’t think that it’s something worth talking about; they do it as a good steward of their employees. So, part of what we do is get people to look at what’s there and make them realize that what they’re doing is more valuable than they expect. Like providing free meals or paying women the same wages as men. It’s always a very positive discussion.
Our assessment is looking at how do you treat the people around you, that’s the priority, then it’s treating things like the environment. There is so much within the hadiths [record of the sayings of Prophet Muhammad] about not wasting resources. It’s already embedded in their thinking very deeply.
Do you only rely on what a company reports? Because most will claim they’re doing well on all fronts.
With self-reporting, it’s quite difficult. A lot of ESG/SDG criteria are self-reporting, even in the conventional world. Once they transparently report what they’re doing publicly, it becomes self-proclaimed information. If they’re telling the world that they’re doing something, employees for example may deny it, but it puts it out in the open for discussion and that’s not a bad thing. So even if you are self-reporting and it’s public and transparent, it’s quite easy for people to shoot at that if you are lying.
At this point, the best thing you can ask for is their commitment to report regularly around certain characteristics.
Which is currently easier – getting conventional ESG investors onboard Islamic finance transactions, or Islamic investors to invest in ESG finance?
I think it’s easier for Islamic investors to find conventional assets that fit their portfolio than the other way around. Because to be honest, most conventional investors don’t necessarily look at Africa, the GCC, Malaysia or OIC countries in general within their mandates. Whereas conventional issuers, whether with assets in Europe or North America, are much easier to digest within Islamic portfolios. I don’t think this will change. Conventional assets are better understood, and better risk rated. There are conventional funds that invest in African and Sub-Saharan African infrastructure but by definition they are smaller.
What’s next for Bedford Row Capital?
For us, the key themes are liquidity and social impact, particularly with rising inflation. Even if it’s not inflation linked, at least you need to be thinking about short-term turnover. Islamic financial institutions and funds cannot afford to continue to sit on the couch; inflation is dropping down returns; they’re going to have to adopt better ways of doing risk management and risk assessment.
Otherwise, they’re just going to continue to lose money and fall behind, and that’s not good for anybody. They have cash; they need to deploy it into new technologies, social housing, and job creating assets. The problem is that infrastructure to do so and the ability to bring new issuers requires people like us or the investment banks to actually do the job they set out to do. There will be pressure while they’re doing more and more to make that change. Because there’s plenty of money that can make big impact and it needs support.
We expect to be bringing to market in Q4 of 2022 a social housing sukuk focused on non-islamic countries (like the UK). The shortage of housing is acute and the need for efficient social impact is perfectly suited for a benchmark size sukuk offering. The UK Government missed its chance; we hope to start to fill some of the gap. In addition, we have been mandated for the first-ever corporate sukuk out of Jordan (Q4 target). We have an Australian client that will issue a sukuk, and we have a UK real estate transaction issuing sukuk. Because they know the capital is there, they’re in the right asset class but they need the support of platforms like Al Waseelah to deliver that. Until we see more people focus on the corporate side, you’re not going to get that kind of impact that is needed for economies to grow.
Also, I’m participating next week in a discussion panel about Egypt. Most of Egyptian investments are currently into real estate and some into healthcare. You’ve got an economy which is at heart a trading nation. There is plenty of space and opportunities to use the land and to bring foreign direct investment. But where is the Egyptian sovereign sukuk? There is one talked about, but it is delayed again. Hopefully, when it comes down to how Egypt actually evolves, the country will issue some kind of sustainability sukuk that helps with problems like water supply, poverty, and housing.