Race to lead Islamic finance

At last month’s World Islamic Economic Forum in London the British prime minister, David Cameron, said the United Kingdom’s capital aims to become a top centre of Islamic finance – echoing similar ambitions voiced by Dubai, Malaysia and others.

Race to lead Islamic finance

Race to lead Islamic finance


■ Dubai will host next World Islamic Economic Forum
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■ Dubai Crown Prince launches Islamic banking centre
Topic Islamic finance Finance Financial literacy

So far, there does not seem to be much more than talk going on in the financial capitals of the world and it is unclear exactly where each country is in the race to dominate the fast growing Islamic finance sector, valued currently at around US$1.6 trillion.

There was $275.2 billion of global sukuk outstanding as of August 31, according to figures from Malaysia’s finance ministry. Ernst & Young forecast in a December report that international demand for Islamic debt will reach $950bn by 2017.

And Islamic finance has been expanding faster than conventional finance according to the Islamic Finance Secretariat, a British lobby group.

The Islamic Corporation for the Development (ICD) of the Private Sector,a Jeddah-based body, has launched a series of numerical studies of Islamic finance to help policymakers to develop the industry. It is collaborating with Thomson Reuters to produce the finance studies, known as the Islamic Finance Development Indicator (IFDI).

The IFDI will track five areas of industry development, which can be broken down by country: social responsibility, quantitative development, governance, knowledge and awareness.

There are many issues that need to be resolved if Islamic finance is to grow into the truly global industry that most analysts expect it to. These challenges include the substantial differences between the Arabian Gulf and South East Asia in the design and use of Sharia-compliant financial products.

Analysts also warn that the industry has often become narrowly fixated on measures such as asset growth.

The expansion of Islamic finance education is also an important part of the industry’s development.

According to a study by the ICD, Britain is at the top of the list with 60 institutions offering Islamic finance courses and 22 universities with similar degrees. Malaysia, the UAE and Pakistan come next.

A total of 655 research papers were issued globally on Islamic finance in the past three years, of which 354 were peer-reviewed. Malaysia published 169 papers in the period and Britain and the United States published a combined 184.


The country’s lenders provide Islamic financing only via foreign-incorporated units, which is hindering growth.

Japan, which introduced equal tax treatment for Islamic bonds last year, is in a similar position to Hong Kong, which hasn’t made much progress in forming a Sharia finance hub because of lack of local demand and familiarity, according to Davide Barzilai, a partner at Norton Rose Fulbright in Hong Kong.

“Japan needs to allow the banks there to facilitate Islamic transactions instead of limiting them to undertake such activities outside the country,” Badlisyah Abdul Ghani, the chief executive at CIMB Islamic Bank, a unit of Malaysia’s second-biggest sukuk arranger this year, told Bloomberg News. “A market requires players. Without players there are no markets.”

Mr Barzilai said: “Islamic finance in Japan is being purely driven from the underlying projects that their companies are involved in. It might be a joint venture with a Saudi entity, which has a Sharia-compliant component. I don’t think it will be coming from the Japanese side unless there’s a specific requirement or reason.”

There are only 183,000 Muslims in Japan, although interest in Sharia-compliant finance has recently experienced a revival and is gaining popularity among Japanese companies operating in Malaysia and other Islamic countries.

Mohd Effendi Abdullah, the head of Islamic markets at AmInvestment Bank said: “There’s a good chance Japan may amend the relevant laws to enable [state-owned banks] to issue sukuk and follow the UK’s footsteps to strengthen its involvement in Islamic finance.”


The world’s biggest sukuk market, Malaysia is not slacking off in its efforts to maintain its lead.


London Wants To Be A Center Of Islamic Finance. Why?

British Prime Minister David Cameron announced this week that he wanted London to become “one of the great capitals of Islamic finance anywhere in the world.”

London Wants To Be A Center Of Islamic Finance. Why?

London Wants To Be A Center Of Islamic Finance. Why?

Cameron said Britain will issue sukuk, or Islamic bonds, valued at $320 million as early as next year.

But what does all that mean? We take a look:

What are Islamic bonds?

Sukuk, which are compliant with Shariah, or Islamic law, are backed by assets or cash. A core tenet of Islamic finance is that it forbids interest, replacing it with profit- and loss-sharing. So instead of charging interest, the sukuk brings a fixed return from an asset or service.

For a fuller explanation of how Islamic finance works, do read this FAQ in the Guardian.

Why is the U.K. interested?

The U.K., as Cameron noted in his speech to the World Islamic Economic Forum in London this week, is already the biggest center for Islamic finance outside the Muslim world. Britain has banks that work on Islamic principles. British landmarks, including the Olympic Village and the Shard skyscraper, have been financed with Islamic investments, as have Britain’s first deep-sea container port and the Battersea power station.

The move would, Reuters notes, “provide a much-needed liquidity management tool for Britain’s six Islamic lenders and could encourage local firms to consider issuing sukuk of their own.”

Where else are they issued?

Malaysia and Dubai dominate the sector. The Economist reports:

“Islamic-banking assets in Saudi Arabia account for more than half the market. Roughly $21 billion in sukuk were issued in Gulf Co-operation Council (GCC) states in 2012, three times as much as 2011. … Other countries are emulating the Gulf model. Recep Tayyip Erdogan, Turkey’s prime minister, has emerged as a leading champion of Islamic finance.”

Do they make money?

Islamic banks, bolstered by their reliance on real assets and cash, weathered the global economic crisis better than regular financial institutions. And globally, the market for Islamic finance stands at $1.2 trillion — a figure that’s expected to grow to $2.6 trillion by 2017.

Cautionary Note

Interest in Islamic finance in Britain has been lukewarm. The Financial Times notes that Qatar had to bail out the Islamic Bank of Britain, and last year HSBC shut its Islamic banking retail operation in Britain.