Islamic finance set to make its mark in UK

Matthew Attwood
13 Nov 2013

Market participants could have been forgiven for feeling a sense of déjà vu last month when UK Prime Minister David Cameron announced plans for a government sukuk. Such sharia-compliant bonds, which avoid interest payments forbidden in Islamic finance, have been discussed before.

Islamic finance set to make its mark in UK

Islamic finance set to make its mark in UK

Islamic finance set to make its mark in UK
In 2008, before the full scale of the financial crisis became known, the Labour government announced similar plans, but these were soon shelved when economic policy priorities changed.

But bankers active in the Islamic sector believe that this time it’s different. Samad Sirohey, chief executive of Citigroup’s Islamic bank, believes Cameron’s plans are more than just a way of raising more money for government coffers.

He said: “This announcement is strategic rather than a commercial move. There’s a desire to create an Islamic finance hub for instruments, for listing, and for indices.”

Crucially, a successful issue would address the tax and regulatory treatment of sharia transactions. This is important because, given the prohibition of interest, Islamic bonds usually involve the transfer of specific assets which are ordinarily subject to capital gains tax, stamp duty and other levies in developed economies. This, say industry participants, is why western markets have yet to play host to a sovereign sharia transaction. Nor has there been any corporate issuance in the western world, despite the growing sophistication of corporate sharia financing in Islamic centres.

Experts in the sector believe the UK debut will involve an infrastructure project, which could also give rise to further sharia issuance from non-government borrowers.

Atif Hanif, a banking partner at law firm Allen & Overy, said: “If the government sukuk is a success, infrastructure issuers might say the Treasury has raised money using this, we have these requirements in infra so maybe we can try and replicate the same sort of approach to obtain funding.”

Investors, as well as issuers, are also likely to be watching developments closely. An investor base for a UK government issue already exists in the form of London-listed Islamic financial institutions.

Bank of England regulations require banks licensed in the UK to hold a stock of liquid assets – securities that can easily be converted to cash. Typically, banks seek liquid assets denominated in the currencies in which they pursue their day-to-day lending and other businesses, but Islamic banks based in the UK do not have appropriate sterling assets to invest in for this purpose.

Citi’s Sirohey said: “Even if [London-listed Islamic financial institutions] were to go for the triple-A instruments issued by the Islamic Development Bank, they’re all dollar-denominated. Something in sterling will help their treasury currency position – matching the currency on their book.”

Abdulaziz Al Duweesh, chief investment officer at Gatehouse Bank, a London Islamic investment bank, said that his bank’s “whole model would collapse” if it failed to maintain its liquidity buffer.

“If the government issues sukuk, that would make our business easier. We wouldn’t have to get a fatwa from our sharia board giving us an exception because we operate in an environment that doesn’t have a sharia bond,” he said.

Bankers believe that solving this problem could lead to more liquidity in the UK.

Mohammed Dawood, global head of sukuk financing at HSBC, said: “Potentially this will encourage the flow of Islamic finance to support infrastructure finance.”

London is already a destination for Islamic money, which is underpinning landmark projects such as the London Gateway deep-sea container port, the Shard and the redevelopment of the Battersea power station site.

Sectors likely to be attractive to Islamic investors include healthcare and affordable housing – Hanif at Allen & Overy said that Islamic money from the Gulf and Malaysia was already funding the development of student accommodation in the UK.

Like all investors, those with sharia mandates want a predictable rate of return and a relatively safe investment. But they also have another box to tick, said Hanif: “On top of that they’re concerned about investments that add social value. These are areas where they will see themselves adding value to society.”

But while infrastructure is an obvious target market given the asset-backed nature of much Islamic finance, there is also opportunity for corporate issuers to prepare less complicated structures for general funding purposes.

Dawood believes this is crucial to the Islamic finance sector’s viability in the UK: “While we’d welcome the market if it moves ahead into infrastructure funding, the development of a broader market across more vanilla issuance would be more sustainable in the longer term,” he said

Jamie Durham, international capital markets partner at Allen & Overy, said there was no legal or regulatory reason why non-Islamic corporates could not issue in sharia format. “Whether they’re looking to borrow on an Islamic basis probably will depend more on how much they are looking to raise and what pricing advantage is there from having an Islamic tranche within the funding structure as opposed to it all being done on a conventional basis,” Durham said.

Corporate issuance need not relate to tangible assets such as property. As the Islamic market has developed, some deals have emerged backed by intangible assets that have a measurable value. Citi’s Sirohey said: “We’ve done that in other jurisdictions. We’ve set up programmes for telecoms built around the concept of minutes of airtime in the network and did an Emirates Airline transaction build around passenger capacity. We’ve got greater flexibility – the market is used to seeing more innovation in structures that have all the appropriate approvals.”

But not every corporate borrower is a good fit for the market as sharia investing is based on ethical principles and not simply the prohibition of interest. Tobacco companies, for example, are excluded as are property companies with bank tenants.

Issuers and structures alike are signed off by sharia boards, but investment committees then make their own decisions.

Spencer Maclean, head of syndicate, west at Standard Chartered Bank said: “Dedicated Islamic investors will have to consider not only the fatwa that is issued on the deal but also their own subjective view on the deal being genuinely Islamic.”

Once a UK benchmark is established, corporates will have a better basis on which to make that analysis.
• Leading the way

Islamic finance is not just done by banks set up with a sharia mandate; several mainstream investment banks enjoy market-leading positions in the global market.

The Islamic bond market was worth more than $44 billion in 2012, with HSBC enjoying a market share of just below 24% of issuance according to figures from Dealogic. Other prominent western financial institutions in the sector are Standard Chartered, which was fourth in the global league table, Deutsche Bank which was sixth and Citigroup eighth.

Mohammed Dawood, HSBC’s Dubai-based global head of sukuk financing, is key to the bank’s effort in the market, as are Rafe Haneef, chief executive of the subsidiary HSBC Amanah Malaysia, and Fahad Al-Saif, head of capital markets and corporate finance at HSBC Saudi Arabia.

The bank works across emerging markets, the Middle East, south-east Asia and relevant markets such as north Africa and Turkey. It has worked on transactions including the first Saudi Arabian government-backed Islamic finance bond, issued via its civil aviation authority last year. The bank was also on this year’s follow-up to that $4 billion transaction.

Other recent deals include Turkey’s debut sovereign sukuk in 2012 and the follow-up this year and, a few weeks ago, the first corporate hybrid sukuk, for Saudi Arabian dairy company Almarai. The team was also involved on the first sharia-compliant bank capital transaction, on behalf of HSBC, last year.

Dawood believes the UK government’s intention to issue will provide opportunities for investment banks active in the sector.

“This will certainly give the banks more options for them to consider when it comes to arranging funding in the capital markets. This transaction will lay the groundwork and provide a number of very useful data points,” he said.

Given that he has an established team based in Dubai, Dawood believes that the bank could service a developing British Islamic finance market from there, in co-operation with bankers based in London.

–This article first appeared in the print edition of Financial News dated November 11, 2013

http://www.efinancialnews.com/story/2013-11-13/islamic-finance-to-make-mark-in-uk

Islamic finance in the global era

by Daniele Atzori
The Islamic World Forum held recently in London consecrates Britain as a world centre of Islamic finance. Suspicions of links with Islamist movements linger as the field is criticised for its “moral failure” vis-à-vis the economic advantages of materialism. Islamic economics and the social doctrine of the Church can lead to dialogue.

Islamic finance in the global era

Islamic finance in the global era

Rome (AsiaNews) – With the ninth World Islamic Economic Forum, held in London between 29 and 31 October, Islamic finance has come into its own and gone mainstream. Until a few years ago, Islamic finance was unknown to most people. Some even equated it to the financing of Islamic terrorism. In fact, in the years right after 9/11, anything about Islam was viewed with concern. Now things are different.

British Prime Minister David Cameron, who spoke at the forum, said that London is no longer happy to be the main Islamic financial centre outside Muslim countries; it now wants to compete directly with Dubai and Kuala Lumpur. In 2006, Gordon Brown, then Chancellor of the Exchequer, expressed similar views. Yet, if they seemed unrealistic to most people at the time, the international situation is now quite different.

With Europe reeling from the economic crisis, the prospect of attracting capital from cash-rich regions, such as the oil-producing countries, is a very attractive idea. In fact, Cameron has announced his government’s intentions to issue a sukuk bond compatible with Sharia in order to raise 200 million pounds.

But what is exactly Islamic finance? For Charles Tripp, professor at the School of Oriental and African Studies in London and author of Islam and the Moral Economy: The Challenge of Capitalism, Islamic finance is rooted in the reactions by Islamic societies and cultures to the penetration of Western capitalism in the nineteenth and twentieth centuries.

At that time, there was a widespread perception that the market economy was a danger to the religious and moral values ​​embodied by the Islamic tradition. Islamic economics developed against this background as a discipline whose aim was to achieve a comprehensive reform of the economic system in accordance with the principles of Islam.

Islamic economists saw socialism and capitalism as failures, since both were based on a conception of human beings that ignored the spiritual dimension. And Pakistani Islamist thinker Abu Ala Mawdudi identified the foundation of Islamic economics in the Qur’anic ban on ‘riba’, usury, defined as interest.

If Islamic economics developed a theoretical basis to critique Western economic theories, Islamic finance, which emerged in the 1970s, represents a practical attempt to create an alternative system.

Thanks to the huge liquidity made available by the oil shock of 1973, Islamic finance saw rapid growth. The first modern commercial Islamic bank, the Dubai Islamic Bank, was founded in 1975. That same year, the Islamic Development Bank – set up by the finance ministers of the members of the Organisation of the Islamic Conference – began its operations.

The early phase of the expansion of Islamic banking reflected Saudi Arabia’s desire to act as the hegemon in the Islamic world. However, as already indicated, when Islamic banks came under suspicion after 2001, their expansion in the West slowed down.

Critics and apologists have tended to treat the relationship between Islamic finance and political Islam with superficiality. The notion that Islamic finance is as an extension of jihadism is in fact flawed and biased. And the relationship between ‘political’ and ‘economic’ Islam is much more complex than it seems.

As Clement Henry and Rodney Wilson point out in their well-researched book The Politics of Islamic Finance, published in 2004, Islamic banks and Islamic movements are often interrelated.

Now, as suspicions wane in public opinion, Islamic finance is increasingly seen as a way to attract capital. Undoubtedly, Islamic finance is a large and constantly growing industry.

The fact that the United Kingdom plays a leading country today in this area should come as no surprise. London is not only one of the main centres of global finance, but is also home to a large Muslim minority.

Great Britain also hosts important centres dedicated to the study of Islamic finance. The Islamic Foundation, based in Markfield, Leicestershire, since 1973, has played a pioneering role in the field.

Inspired by Islamist thinker Abu Ala Mawdudi, intellectuals from the Indian subcontinent are among the founding fathers of Islamic economics who built the theoretical platform upon which it stands.

Thanks to the close relationship between the subcontinent, on the one hand, and Britain, on the other hand, the latter has become one of the leading centres of contemporary Islamic thought. In particular, the Pakistani diaspora in Britain has come to play an important role in the genesis and development of Islamic economics and finance. This is truly a global phenomenon.

There is a widespread misconception that Arab and Islamic are the same thing. However, places like Pakistan and Malaysia, which are not on the margins of the Islamic world, have played a key role in the history of Islamic finance.

This great worldwide expansion has led to new challenges. As noted, Islamic economics developed from a desire to reform the economic system in accordance with the principles of Islam. However, Islamic finance, emerging as the ‘operational arm’ of Islamic economics, has often been accused of neglecting Islam’s original ethical inspiration. Indeed, is the development of Islamic finance a step towards the Islamisation of the economy or is it the victory of homo economicus over homo islamicus?

The debate over this issue has been intense, and has led some Islamic intellectuals to criticise the very foundations of this type of finance. Mawdudi’s approach, which was very influential with the so-called ‘founding fathers’ of the field, focused disproportionately on the legal aspects of Sharia, at the expense of its ethical basis.

Rapid growth of Islamic finance has been paralleled by the growing difficulty of dealing with socio-economic problems that challenge Islamic economics. This has led to a debate that intellectual Mehmet Asutay has called the “socio-ethical failure” of Islamic finance. In his view, Islamic banks that abide by the rules of Sharia have however ignored its spirit, its ethical basis. In short, Homo islamicus has submitted to the power of homo economicus.

The critique by Islamic economists of our economic and social model has led them, in many ways, to reflections that are parallel to those that have come out of other great religious traditions of humanity, above all the social doctrine of the Church.

From Rerum Novarum in 1891 to Caritas in Veritate in 2009, the Catholic Church has been deeply involved in thinking about the same issues addressed by Islamic economics. An ecumenical debate on these issues would thus be an additional source of hope for humanity.

http://www.asianews.it/news-en/Islamic-finance-in-the-global-era-29449.html

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.

http://www.npr.org/blogs/parallels/2013/11/01/242325486/london-wants-to-be-a-center-of-islamic-finance-why

Lawyers call for clarity of rules if UK is to become Western hub of Islamic finance

Middle East experts urge UK Government to relax laws on Shariah-compliant finance, writes Pui-Guan Man

Lawyers call for clarity of rules if UK is to become Western hub of Islamic finance

Lawyers call for clarity of rules if UK is to become Western hub of Islamic finance

With the Islamic finance industry estimated to be worth £1.3trn next year, it is no surprise that David Cameron wants the UK to cash in on the boom. Aiming to make London the capital of Islamic finance in the Western world, the Prime Minister last week unveiled plans for the UK to become the first non-Muslim country to issue an Islamic bond.

With a history of providing financial services to the Middle Eastern markets that goes back at least 30 years, proof of the UK’s growing Islamic finance sector can be found in the developments of the Qatari-backed Shard Tower and Chelsea Barracks, as well as Malaysian-backed Battersea Power Station – all of which have been funded using Shariah-compliant structures.

But it is clear to leading Islamic finance lawyers that the UK has a long way to go before reaching a similar status to the likes of Dubai and Malaysia, which have already established themselves as major Islamic financial hubs within the Muslim world.

Clifford Chance’s (CC) Dubai-based head of Islamic finance Qudeer Latif estimates that developed Western economies might only see about 10% of global Islamic finance work compared with the volumes seen in the Middle East, which he put at roughly 60% to 65%. Meanwhile, Islamic finance itself might only constitute about 1% of global financial assets.

However, Latif stresses that while it might seem like a drop in the ocean, the industry has grown twice as fast as conventional finance in the past two years, making it a worthwhile industry for investors.

While UK lawyers welcome the Treasury’s planned sukuk launch next year, alongside a new Islamic index on the London Stock Exchange, they are not expecting to witness an immediate surge in demand for specialist advice. But it does seem to be a sign that London has regained a level of confidence in sukuk lost when the global financial crisis hit, and the product almost died out.

And while the sukuk bond might be comparatively small (valued at about £200m by next year), the more important benefit may be the message it sends the international community about the UK’s commitment to accessing Islamic investors.

bi-farmida-master-july09-webNorton Rose Fulbright partner Farmida Bi (pictured), head of the firm’s Islamic finance practice in Europe, says: “The UK has the only Western system that completely allows for Islamic finance – we have the existing links to the Islamic world and the liquidity for it.

“The only thing missing was a high-profile transaction, and I think the sukuk issue is the landmark deal that can help UK corporates realise that there is money to be found in the Islamic markets.

“Hopefully, the announcement will create a larger volume of work, but we will have to wait and see. It has been very positively received – I’ve had many calls from clients in the Middle East and Asia since.”

Growth of the Islamic finance sector globally in recent years has placed demands on law firms to spread their specialist advisers beyond the traditional Middle East markets, not only to Asia, but increasingly into Europe as well.
CC, for example, has more than 40 partners and associates in the Middle East with experience in Islamic finance, and about 10 in London.

Linklaters head of Islamic finance Neil Miller comments: “A huge amount of the industry is organised by financial institutions with headquarters in London. There is a need for lawyers based in the UK or trained in English law to provide advice as the English legal system is the dominant system governing cross-border Shariah-compliant transactions.

“We expect to deal with more of these types of transactions in London following this initiative. By issuing domestic sukuk, it would improve efficiency in the UK for all parties involved when it comes to balance sheets and can reduce both the cost of funding and operating costs. It is an important piece of the jigsaw.”
But while the sukuk is an important step in tapping into the Middle East’s liquidity, there are calls for more changes to laws in order to accommodate the more unusual types of structures that some deals call for.

Latif cautions: “One of the main challenges in the UK now is to make sure Islamic finance is treated the same as conventional finance from a tax perspective. The use of underlying assets for structuring means that there can be adverse tax consequences for Islamic finance deals.

“The UK has created a level playing field for many vanilla instruments, but not the more exotic structures that are common in Dubai or Malaysia. So in order for the UK’s Islamic finance industry to continue to grow, it must continue to amend laws to accommodate these structures.”

http://www.legalweek.com/legal-week/analysis/2305309/lawyers-call-for-clarity-of-rules-if-uk-is-to-become-western-hub-of-islamic-finance

UK sector still ‘thin’ on Islamic finance teaching

Despite government optimism over UK’s future role, university provision remains limited, forum hears British universities do not have “strength in depth” in the teaching of Islamic finance, an economic forum has heard, casting doubt on a recent government pledge for the UK to lead the West in the banking practice.

UK sector still ‘thin’ on Islamic finance teaching

UK sector still ‘thin’ on Islamic finance teaching

To coincide with the World Islamic Economic Forum held in London last week, the government announced plans to issue a £200 million sukuk, or Islamic bond, which would be the first to be issued by a non-Muslim country.

Islamic finance forbids the charging of interest, and instead uses other mechanisms to allow the lending of money.

The City of London can become the “unrivalled Western centre for Islamic finance”, the chancellor George Osborne argued last week.

The UK “has more than a dozen universities or business schools offering executive courses in Islamic finance”, Mr Osborne wrote in the Financial Times on 28 October.

But at a workshop on Islamic financial education at the forum on 31 October, Daud Vicary Abdullah, chief executive of the International Centre for Education in Islamic Finance (INCEIF), a Malaysian university that specialises in the discipline, said UK expertise was “spread very thin”. “The centres of excellence in terms of education in universities…are variable,” he said.

Ten years ago, Mr Abdullah said, Loughborough University had a good reputation for teaching Islamic finance but it no longer runs a dedicated course.

“The problem is that it [Islamic finance] tends to revolve around the individuals and personalities,” he argued. “There isn’t what I would call the strength in depth to really allow the education to take off.” But through collaboration, he said, it could “take off fairly quickly”.

Set up in 2005 by the Central Bank of Malaysia, INCEIF now has 2,000 students and offers qualifications up to PhD level, Mr Abdullah noted. This year it launched a joint research initiative with Henley Business School at the University of Reading.

Julia King, vice-chancellor of Aston University, agreed that while there were “excellent centres” of Islamic finance education in the UK, it was “an area that needs to grow”.

From this year, Islamic finance was a core part of Aston’s undergraduate finance programmes, she said, and should be incorporated further into such courses.

The workshop also heard a question from a graduate of a “red-brick” university who failed to find an Islamic banking job in London despite training in the subject.

Mr Abdullah agreed that there were only a few banks in the UK interested in Islamic finance.

[email protected]

http://www.timeshighereducation.co.uk/news/uk-sector-still-thin-on-islamic-finance-teaching/2008759.article

Islamic finance, the Gulf and London’s future as a global hub

David Cameron’s highly symbolic speech at last week’s 9th World Islamic Economic Forum confirmed the government’s commitment to develop London as an important hub for Islamic finance. London Mayor Boris Johnson was also keen to encourage investment, pledging £100m to attract tech start-ups from the Muslim world.

Islamic finance, the Gulf and London’s future as a global hub

Islamic finance, the Gulf and London’s future as a global hub

It is not surprising to see both national and local government seek this investment, as London is in many ways ideally placed to benefit from a growth in this special form of finance. In the race to attract the sector, London enjoys various historic and cultural advantages over many of its rival financial centres.

Sharia-compliant banking has been handled in the UK since the early 1980s and London has long been at the centre of business and investment in the Muslim world. In the 90s, London began to provide more sophisticated and structured Islamic services, as local financial services and legal firms acquired enhanced knowledge and experience of the market.

Over the years, London has managed to maintain the industry. Last year it had about US$18.5 billion in sharia-compliant assets, the 9th most of any city in the world.

This experience in Islamic banking gives the city a degree of social capital in the field, unmatched by rival financial centres in the West.

The UK government now recognises Islamic finance as a valuable proposition, one which can bring innovation and diversity in the well-established UK market. Ultimately, it can support London as an international financial centre.

Why Islamic finance?

Current economic reality, both in the UK and globally, provides an important rationale for the government’s desire to attract capital from the Gulf.

With most Gulf investors aiming for sharia compliant investment or Islamic financing, moves by UK governments over the years to facilitate them are simply responses to economic conditions. After all, given Islamic finance has already been behind developments like the Shard or the Olympic Village, local and national governments would be foolish to ignore its potential. In addition, financial inclusion in terms of providing financial access to Muslim community according to their religious tenets has played a role as well.

The recent commitment by the UK government again aims to attract further capital to London, accompanied by the political will to provide a more welcoming environment by extending the Islamic finance sphere through sukuk, or Islamic bonds, for example.

There are four ways in which Islamic finance could be developed in the UK:

Engagement: The relevant authorities must engage with businesses, retail groups, Sharia scholars, regulators and the financial product providers themselves to ensure the right environment for Islamic finance to flourish in London. Coordinating all these various groups will be tough, and that is why the formation of an “Islamic finance task force” is essential, as announced earlier this year.

Investment: Existing UK-based Islamic banks and financial institutions should invest in product design, launch and distribution to be able to maintain a competitive edge.

Competitiveness: The legal, regulatory and financial environment should work in coordination to ensure London’s competitiveness in terms of providing the right environment for future Islamic finance activity in the capital.

Demonstration: This will require providing all the necessary conditions for the existence and growth of the market. The Prime Minister’s indication of a sovereign sukuk sends a symbolic signal to other competing markets indicating that London is taking this seriously.

This would all be part of a process of increasing the provision of financial services at all levels in society, something development economists call “financial deepening”, an important boost to economic growth.

Global rivals

While London has for some time aimed at becoming an Islamic finance centre, other financial centres including Tokyo, Hong Kong and New York, could perhaps be considered as potential competitors.

However, none of these rivals appear to have London’s political backing. This not only enables appropriate laws to be passed, but it also provides Islamic capital with confidence that it will be well received in the country.

Tokyo remains hesitant, while New York still strategically keeps away from Islamic finance. Hong Kong represent important competition, being open and welcoming to Islamic finance but London still has the competitive edge.

Istanbul promises to become a serious competitor in future, with a growing Islamic finance sector based in the Muslim world’s second largest economy benefiting from close ties to both East and West.

Entirely new rivals may emerge, but Islamic finance’s risk averse attitude generally motivates it to remain in known traditional markets rather than new shores which may have higher returns, but also higher risks.

Recent commitments to develop Islamic finance in the UK represent a positive move. The UK economy will derive further benefits from attracting Islamic capital, and London’s position as a global financial centre will be strengthened.

For further reading on the subject, see our Explainer: how does Islamic finance work?

http://theconversation.com/islamic-finance-the-gulf-and-londons-future-as-a-global-hub-19866

Islamic Finance Can Save the World

The U.K. government’s decision to issue a sukuk — a bond that complies with Islamic Sharia law — raises an interesting question: What if the U.K. and other non-Muslim countries switched fully to Islamic principles in finance?

Islamic Finance Can Save the World

Islamic Finance Can Save the World

I think the world might be a better place.

The U.K.’s planned $323 million issue is largely a political move, meant to establish London as a major Islamic banking center. In an article for the Financial Times, the U.K. finance minister, George Osborne, wrote of the British government’s desire to become “the first sovereign to issue an Islamic bond outside the Islamic world.” It won’t be the first Western government to do so: In 2004, the German federal state of Saxony-Anhalt issued a $123 million sukuk, attracting investors from Saudi Arabia, Malaysia and Bahrain, as well as from the U.S., U.K., Germany, Japan and Hong Kong.

The first ever “Islamic bond” was probably issued in 1775 by the Ottoman Empire, which borrowed against future customs duties on tobacco. The 2004 Saxon bond was a contract known as ijarah, in which investors buy shares in a special purpose vehicle that collects rent on an asset, often a land parcel. Instead of interest payments, which are banned under Islamic law, the sukuk holders receive a portion of the rent. At the end of the contract’s term, the asset is sold to repay the original investment.

In other words, sukuk are always tied to an underlying asset providing a certain revenue stream — a feature that makes them particularly conducive to financial stability. If countries like Greece, Spain and Italy held to Islamic finance principles, they would not have been able to run up enormous unsecured debt burdens. They would only have been able to borrow against streams of revenue, such as taxes and customs duties, that they could reasonably expect to collect.

Such constraints would not necessarily have an adverse effect on growth. There are types of sukuk, such as musharakah and mudarabah, which allow holders to share in profits and even losses much as if they were equity investors. The main difference is that governments would be able to hold onto strategic assets no matter what. In that sense, the deals are akin to Western production-sharing agreements.

In the Islamic financial world, money is not a tradeable commodity, and it has no time value. It is merely a medium of exchange. As time goes by, all that changes is the level of risk: The longer an investor has to wait to be repaid, the greater the chance of an adverse event. Goods that do not exist at the time of the sale cannot be sold. These principles discourage speculation and the creation of derivatives without a deliverable underlying asset. Money is always tied to the real economy. If that relationship were always observed, energy prices, for one, might be much less volatile.

An Islamic mortgage bond, for example, would consist of Sharia-compliant mortgages, in which the borrower makes a large down payment and pays rent to the lender, who owns the property until the term runs out. Subprime mortgage bonds, along with the related derivatives that did so much damage during the 2008 financial crisis, would not be possible.

Islamic finance accounts for only about 1 percent of global assets, but as Osborne pointed out, it is growing 50 percent faster than traditional banking. According to Ernst & Young, the value of Sharia-compliant assets worldwide stands at $1.8 trillion, up from $1.3 trillion in 2011. Non-Muslim investors have a healthy interest in the instruments because of the security they offer. In Malaysia, 80 percent of Sharia-compliant assets are held by non-Muslims, according to a report by Infosys.

Religion notwithstanding, Islamic bankers might have something the world wants after the recent crisis: Finance that people can understand.

(Leonid Bershidsky, an editor and novelist, is a Bloomberg View contributor. Follow him on Twitter.)

http://www.bloomberg.com/news/2013-10-29/islamic-finance-can-save-the-world.html

Some unlikely players are getting into Islamic finance

By Shaheen Pasha October 2, 2013

Shaheen Pasha teaches international journalism at the University of Massachusetts-Amherst. She has reported from Dubai and Cairo, covered Islamic finance for Reuters, and guest edited the Islamic finance supplement for the Times of London.

The UK is home to 2.7 million Muslims and three Islamic banks. Reuters/Toby Melville

Some unlikely players are getting into Islamic finance

Some unlikely players are getting into Islamic finance

Global markets are vying to get a piece of the action in Islamic finance. With an emphasis on ethical investing and prohibitions against interest and excess risk, the relatively nascent industry has struck a chord with investors burned by conventional finance in recent years. According to Ernst & Young’s World Islamic Banking Competitiveness Report 2013, Islamic banking assets held by commercial banks globally are expected to exceed $1.8 trillion this year, a 38% increase since 2011. The vast oil wealth present in the Middle East and an aggressive push by Malaysia to serve as an Islamic finance hub in Asia have helped drive the growth. But the industry is also getting a boost from markets outside the Muslim world. Here are four markets to watch:

UNITED KINGDOM

With 2.7 million Muslims, the UK is ramping up ambitions to be the Western capital of Islamic finance. The country launched an Islamic finance task force in March, aimed at bolstering business compliant with sharia, or Islamic law. London is hosting the World Islamic Economic Forum this month, a conference of Islamic financiers that attracted more than $8.6 billion in financial deals last year. London’s involvement marks the first time the event has been held outside of a Muslim country. Currently, 22 British financial institutions offer Islamic products and there are three standalone Islamic banks, including the Bank of London and the Middle East, which plans to list its shares on Nasdaq Dubai this month in a clear bid to participate in the growing Islamic economy in the Gulf. The country revised its tax legislation to accommodate Islamic bond, or sukuk, issuance but plans to offer its first sovereign sukuk were abandoned in 2009 as the global economic crisis sapped enthusiasm. Even so, London remains a major player in the sukuk market with the London Stock Exchange reporting that over £22.3 billion has been raised through 49 issues of sukuk on the LSE.

INDIA

By all measures, India should be a natural player within the Islamic finance industry. The world’s largest democracy boasts one of the largest populations of Muslims in the world at 177 million; only Indonesia has more. But a long history of religious strife and political power struggles between the dominant Hindu population and Muslims has made India reluctant to embrace Islamic finance. Under the country’s current laws, the financial sector requires banking to be pegged on the concept of interest, forbidden in Islam. But a recent decision by the country’s central bank, the Reserve Bank of India (RBI), to allow a firm in the Kerala to operate as a non-banking financial company that follows Islamic principles is raising hopes that India will soon allow sharia-compliant business to develop further.

It is an uphill battle, to be sure, based on precedent. Last year, the RBI pulled Kerala-based financial firm Alternative Investments and Credits Ltd.’s (AICL) license after 10 years, saying it violated India’s laws on charging interest, through its Islamic model. But experts say there is a change in the air, with India seeing Islamic finance as one method of helping to attract more investment from cash-rich Gulf states to help finance proposed infrastructure projects. If the political and economic will is present, there may be enough momentum to overcome pressure from right-wing critics, such as the Bharatiya Janata Party (BJP).

LUXEMBOURG

This tiny country is playing a big role in the development of Islamic finance. It has grown into the leading non-Muslim domicile for sharia-compliant investment. Luxembourg already is a hub for internationally distributed investment funds but its emphasis on developing Islamic finance helped it attract Middle Eastern capital. It became the first country in Europe to host an Islamic finance institution in 1978, and with its reputation as one of the best tax regimes in Europe, Luxembourg has been a magnet for Islamic finance deals. As of 2012, the country has 41 sharia-compliant funds with €4 billion in assets under management. It is the main destination for listing sukuk in Europe, according to a report by Ernst & Young.

While Islamic finance is certainty gaining in popularity, the industry has struggled to expand due to a shortage of highly liquid, investment-grade financial instruments that Islamic institutions can trade to manage their short-term funding needs. To help with that, Luxembourg’s central bank co-founded the International Islamic Liquidity Management Corp (IILM) in 2010 with other central banks from Asia, the Middle East and Africa. The IILM issued its first dollar-denominated $490 million Islamic bond August, a move that is being seen as a first step toward create a cross-border market for Islamic financial instruments.

TURKEY

At first glance, Turkey seems to be a no-brainer when it comes to embracing Islamic finance. As the eighth most populous Muslim country in the world and Europe’s only Muslim country, there’s a natural market for sharia-compliant business. But Turkey long prided itself on a secular stance toward finance and politics, even referring to its four Islamic banks as so-called participation banks to imply the profit-and-loss-sharing model of Islamic finance. As the global financial crisis weakened Western markets, however, Turkey made the strategic decision to put aside its reluctance and strengthen ties with its oil-rich Middle Eastern brethren.

That decision is expected to make Turkey a major player in Islamic finance going forward. Ernst & Young estimates that the Islamic banking sector will triple in 10 years reaching $100 billion by 2023. Sukuk will play a major part in this growth. Turkey revamped its tax laws to allow for the issuance of one type of sukuk without double taxation and the country’s Capital Markets Board said in April that it is looking to expand its offerings to encompass other forms of Islamic bonds. Turkey issued its first sovereign sukuk in 2012 and said it will issue lira-denominated sukuk twice a year. Given Turkey’s secular legal environment, the success of its offerings has been hailed as a benchmark for Western markets seeking to enter the Islamic finance market.

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http://qz.com/130391/some-unlikely-players-are-getting-into-islamic-finance/

Why Islamic finance could be our best “soft” foreign policy tool

With global Islamic investments expected to hit over £1.3 trillion next year, and Islamic finance accounting for only 1 per cent of all global finance the UK Government is right to identify Islamic finance as a key growth area.

World Islamic Economic Forum.

Why Islamic finance could be our best “soft” foreign policy tool
Speakers at the World Islamic Economic Forum, which took place in London this week. Photograph: Getty Images.

I broadly welcomed the announcement from the Prime Minister at the opening of the World Islamic Economic Forum that a new Islamic Index will be created on the London Stock Exchange and that there are real plans afoot for the UK Government to issue a £200m Islamic bond, or sukuk. With global Islamic investments expected to hit over £1.3 trillion next year, the fact that 25 per cent of the world’s population is Muslim and yet with Islamic finance accounting for only 1 per cent of all global finance the UK Government is right to identify Islamic finance as a key growth area.

With growth of over 150 per cent in Islamic finance in the last seven years alone, this is trajectory the UK is right to be grasping. But among all the arguments around increasing the competiveness of London as a financial sector was a wider point missed?

As well as economic competiveness, Islamic finance offers a unique opportunity for broader relationship building between the West and the Islamic world, and in particular the Middle East, which could have important foreign policy outcomes. In an age of fiscal restraint, defence retrenchment and conflict weariness in the West, the PM’s announcement offers the chance to build a new type of multi-lateral alliance between regions, driven not by traditional diplomatic tools but by business and global investors, overseen by government.

This new type of alliance is likely to be less constrained by traditional short-term political considerations. Given on-going disagreement with the west over how to respond to issues across the Middle East, Islamic finance offers a new focus around which both politicians and the international business community can rally around. Outstanding political questions remain, particularly around the viability and taxpayer risk of the sukuk which need to be ironed out with strong political will. I urge the UK Government to stick to the task. Political history teaches us that commerce leads to peace and stability.

In addition for the UK, the setting up of London as an Islamic finance centre allows the UK to begin to invest in the region, complementing the last few decades of, particularly Gulf sponsored, investment in the UK. It also enables the UK Government to focus on investing in, and building up, assets which suit the UK’s broader foreign and defence policy in the region such as around security, energy, technology and defence co-operation. The challenge for Islamic finance is to truly compete on an international scale, recognising the need for greater innovation and creativity to distinguish it from conventional banking and enable the sector to solve problems that cannot be addressed by current banking arrangements. In the process, we open up the possibility of a whole new range of bi-lateral and multi-lateral arrangements as well as building much needed understanding between the two regions.

This new economically-driven foreign and defence policy is already occurring through the development of military partnerships between the UK and the countries of the Gulf Co-operation Council (where UK exports now amount to £17bn per year). A recognition that the Islamic world is a growing economic region as well as a centre of trade and finance as well as an entry point to a whole new set of markets must continue to guide UK foreign policy. And the specific role of Islamic finance should be properly considered as an important tool in this armoury.

Mohammed Al Ardhi is the Vice Chairman of The National Bank of Oman, which is at the heart of Islamic Finance in Oman and received the “Banker of the Year” award from the Banking Magazine for the development of Islamic Finance across the Gulf Region. Al Ardhi is also the former Chief of the Omani Air Force and a member of the International Advisory Board of the Brooking Institute.

http://www.newstatesman.com/business/2013/10/why-islamic-finance-could-be-our-best-soft-foreign-policy-tool

 

UK aims to become centre for Islamic finance

London, UK – Britain is set to the become the first non-Muslim nation to raise money by issuing a government bond-style “Sukuk” compliant with Sharia law as part of a bid to transform London into a global capital of the Islamic finance industry.

UK aims to become centre for Islamic finance

UK aims to become centre for Islamic finance

David Cameron, the British prime minister, unveiled the scheme along with plans to launch an Islamic market index at the London Stock Exchange as the British capital this week played host to the World Islamic Economic Forum (WIEF), an annual gathering of political leaders, chief executives and delegations from across the Muslim world.

“Already London is the biggest centre of Islamic finance outside the Islamic world, but today our ambition is to go further still,” Cameron told the event. “I want London to stand alongside Dubai and Kuala Lumpur as one of the great capitals of Islamic finance anywhere in the world.”

Established in Malaysia in 2006, the WIEF aims to embed Sharia principles at the heart of financial and economic affairs. Islamic finance requires that deals are based on real assets and forbids usury, the practice of lending money and charging interest, while risk must be shared between both parties to a transaction.

“It means you should not be involved with interest, uncertainty and speculation,” Dzuljastri Abdul Razak, a professor at the International Islamic University in Malaysia, told Al Jazeera. “It’s basically about building the real economy. You can only sell something that exists. If you treat money as a commodity then there’s no asset.”

Britain is the first non-Muslim country to host the WIEF, and Cameron’s presence along with a gala dinner hosted by Prince Charles, the heir to the British throne, and cameo appearances by Boris Johnson, London’s extrovert mayor, offered ample evidence of the event’s significance to the government.

“It’s all about sending a message. It’s a message that says, ‘Look guys, you want it this way, in London you can have it this way. We’re quite relaxed. We’re happy about it and we want you to come and do your business here.'” Edward Lister, London’s deputy mayor, told Al Jazeera.

‘The UK needs capital’

Cameron said the government was working on the practicalities of issuing a Sukuk – a bond-like financial certificate used to raise money that is based on shared ownership of an asset rather than a promise to pay interest – worth £200 million ($320m) by next year.

Though comparatively small, given that the UK currently owes investors more than £1.2 trillion ($1.92 trillion), Mehmet Asutay, an expert in Islamic finance at Durham University, said the announcement amounted to a “huge signal” of the government’s commitment to attracting Islamic money, especially from wealthy Gulf states.

“Like most European countries, the UK needs capital. Everyone knows capital is essential for sustainable economic growth and since the global financial crisis the sources of capital in the western world have dried up, but in the Gulf of course there is huge capital available,” Asutay told Al Jazeera.

But Asutay said global demand for Sharia-compliant financing was still relatively untapped, and the UK was also positioning itself to capitalise on a growing industry.

Everyone knows capital is essential for sustainable economic growth and since the global financial crisis the sources of capital in the western world have dried up

Mehmet Asutay, Islamic finance expert

The global market in Islamic finance is currently estimated to be worth about $1.3 trillion, or just one per cent of the world’s total financial assets, yet Muslims make up about a quarter of the planet’s population.

Large Islamic countries such as Indonesia and Turkey are now developing their own financial sectors after years beset by political and economic instability, while potential markets in Africa were also opening up, Asutay said.

Asutay said the UK would face stiff competition from inside the Muslim world, with Kuala Lumpur having already established itself as an Islamic financial hub, and with the World Bank this week opening its first Islamic finance centre in Istanbul.

But he said London’s traditional strengths as a financial capital and the legal and regulatory security it could offer foreign investors could give it an edge over its challengers.

“The reality is that London has always been an important financial centre regardless of crises and ups and downs. It is open, it is very liberal and it hasn’t questioned the religiosity or the ideology of money. Its institutions have been around for longer than some of the countries we are talking about, so that gives London a lot of leverage.”

Britain’s burgeoning Islamic finance sector is already shaping the London skyline, having funded the construction of the Qatari-owned Shard, western Europe’s tallest building.

Other major London property developments at Chelsea Barracks and Battersea Power Station are also based on Sharia-compliant funding, while 49 Sukuk issued through the London Stock Exchange since 2007 have raised $34bn.

Alternative funding

Modern Islamic global finance is a relatively recent invention, dating to the establishment of the Saudi Arabia-based Islamic Development Bank (IDB) in 1975 as an alternative source of funding to the World Bank for Muslim nations.

Critics argue that the system amounts to an exercise in theological semantics, creating instruments that look and feel like conventional financial products and fall short of strict adherence to Sharia principles.

But Azmi Omar, head of the IDB’s research and training institute, said the industry was working hard to address that criticism.

UK aims to become centre for Islamic finance
The Shard, the tallest building in western Europe, was financed by investors from Qatar, an energy-rich Gulf state [EPA]
“There are fatwas to say that we have to move away from so-called legal tricks, and we have a financial product development centre that is working to resolve some of these issues,” he told Al Jazeera. “Islamic banking is still new, so we are still trying to evolve and develop new products that meet the needs of the industry.”

Advocates argue Islamic finance has the potential to radically transform the global economy, by rooting ethics and social responsibility at the heart of banking and financial affairs.

Dzuljastri Abdul Razak believes that a Sharia-based financial system would not have been prone to the sort of crisis triggered by credit-based speculation in sub-prime debt in 2007 from which the global economy is still recovering.

“Islamic finance has an answer to the issues that caused the crisis so it is fitting at this kind of conference that we explore these opportunities,” he said. “The strength of Sharia is that there is an ethical dimension, and there is consideration of the people affected.”

Iqbal Saqlain, a member of the WIEF’s advisory panel and a former secretary general of the Muslim Council of Britain, said the endorsement of Islamic financing would also benefit British Muslims, many of whom have traditionally conducted their personal and business affairs beyond the reach of high street banks, by bringing them into the mainstream economy.

Britain has a Muslim population of about 2.8 million, including about one million in London, with a combined spending power estimated at more than $20bn. The government has also launched schemes to offer Sharia-compliant student loans and business start-up loans.

“They were literally keeping funds in cash or in some dodgy investments in the name of Sharia, and people have lost lots of money,” Saqlain told Al Jazeera. “Now you have legitimate Sharia-compliant investment opportunities and the Muslim community has been empowered.”

Source: Al Jazeera

http://www.aljazeera.com/indepth/features/2013/10/uk-aims-become-centre-islamic-finance-201310319840639385.html