Cold water thrown on London's Islamic finance ambitions

November 28, 2013.

Finance ambitions –> Mark Mobius , an emerging markets investment expert at Franklin Templeton , certainly stirred things up at the Global Islamic Economy Summit in Dubai .

Cold water thrown on London's Islamic finance ambitions

Cold water thrown on London’s Islamic finance ambitions


You would expect at a gathering in the UAE that he would say nice things about the Emirates, and he duly expressed his belief that for ease of doing business, and as an investment destination, it was the best place in the region, rivalling any in the world. But what he said next went above and beyond the call of duty.

Asked which of the “big three” global Islamic centres – Malaysia , Dubai or London – had the best chance of achieving global hub status, his reply was blunt: “London doesn’t have a chance.” Mr Mobius explained that the British capital would be ruled out because of two issues: tax and regulation.

Levies by the government on the financial industry – all the heavier since the financial crisis and austerity regime of the Cameron government – and increasing red tape – for much the same reason – make London simply too expensive, he said. His view flies in the face of accepted wisdom. Strategic thinking about the global Islamic economy usually results in it splitting between the three centres, with London regarded as the premier market in the European time zone, Dubai and Malaysia assuming the same place in their own geographies.

It must have come as a surprise to Baroness Warsi , the British foreign office minister, who had appeared on the same stage in Dubai a few minutes earlier to extol the virtues of London as an Islamic financial centre, especially for the listing of sukuk (Sharia-compliant bonds). Only a few weeks ago, the British prime minister David Cameron won plaudits from the Islamic business world by becoming the first non-Muslim country to issue a sovereign sukuk, with a £200m (Dh1.18 billion) issue planned for early next year.

So is Mr Mobius right? Some of the statistics seem to bear him out. In figures prepared for the Dubai summit by the information group Thomson Reuters, London is way down the global league tables for sukuk issuance. Between 1996 and 2013, Malaysia was by far the most active country in the sukuk issuance, with an aggregate value of $324bn worth of bonds. Next, a long way behind, came the UAE , with $47bn worth, followed by Saudi Arabia, with $39bn . London was way out of the reckoning, with a mere $279m of sukuk issued, far behind even the US, which has so far not shown much interest in Islamic finance, but which issued $765m worth in the same period. So London is way off top spot in the issuance league. But when it comes to listing and trading it is a different story.

Sukuk issuers chose to list, and often trade their instruments, on the London Stock Exchange , which has $44bn worth of sukuk debt listed, the highest number in the world. Liquidity and sophistication of London markets prove highly attractive for those seeking to list their debt. Sukuk trading in the secondary market is more complex. Most of the secondary market trading in sukuk was in over-the-counter form – that is, not on a recognised transparent market – and therefore impossible to estimate accurately. London financial institutions involved in sukuk trading would not voluntarily disclose details of their business, it was said. The picture is further complicated by the fact that many sukuk holders do not trade them at all.

There is a global supply gap of sukuk of about $270bn , which will narrow as more issues come up in the next couple of years, but until then many sukuk holders will opt to hold on to their paper. As a world city of prestige, London has other attractions in the race for global hub status – structural, lifestyle and cultural advantages – that might enable it to sustain its position, especially with regard to listing and trading, against its competitors.

Mr Mobius’s rather dramatic assertion appears to be based on some solid evidence. But the next few years, as Dubai seeks to become the global centre of Islamic economy, will determine whether or not he is right. Maybe it should not be regarded as a horse race between three competitors. The message from the summit was that the Islamic financial market is growing so fast it will be able to accommodate many hubs.
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Source: National, The (United Arab Emirates)

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

Islamic finance for beginners

What’s so Islamic about Islamic finance? Do you have to be a Muslim to do it? Does it make more money than conventional finance? Here’s a quick guide with everything you need to know

Islamic finance for beginners

Islamic finance for beginners

An Iranian gold coin. Iran came top of the list for global islamic finance last year, could the UK be next? Photograph: Atta Kenare/AFP/Getty Images

London is hosting a meeting of the World Islamic Economic Forum – the first city in a non-Muslim country to do so. David Cameron will use the opportunity to boast British credentials when it comes to Islamic finance, announcing plans to create a £200m Islamic bond by early next year.

Finance is described as Islamic when it complies with sharia, a set of moral laws laid out in the Qur’an and writings about the prophet. Sharia forbids making money from money which begs the immediate question; how can banks that don’t charge interest survive? It’s a question worth answering, not least because academics have argued that the financial crisis wouldn’t have happened if the global economy was regulated by Islamic finance.

How it works

Islamic finance is all about sharing risk between financial institutions and the individuals that use them. To do that, the two parties are tied into a longer-term relationship with each other that is supposed to shift incentives and avoid cut and run financial deals.

So, for example, sharia-compliant mortgages mean that the bank and the borrower share the risks of repayment rather than charging any form of interest. Similarly, Islamic bonds like the one announced by David Cameron today involve both parties owning the debt, rather than a simple promise to repay a loan.

Since it’s Islamic, that also means that financial trading is off-limits for things that are forbidden even if no interest is charged – so investments can’t be made in alcohol, tobacco, non-halal meat products such as pork, pornography or gambling companies. So if there’s no interest and gambling on high-risk ventures is a no-no, how can Islamic banks be profitable? Hilary Osborne explains:

banks can profit from helping customers to purchase a property using a ijara or murabaha scheme. With an ijara scheme the bank makes money by charging the customer rent; with a murabaha scheme, a price is agreed at the outset which is more than the market value. This profit is deemed to be a reward for the risk that is assumed by the bank

You don’t have to be Muslim to use Islamic financial services – a fact which has stimulated further interest in the sector. The Islamic Bank of Britain reported a 55% increase in applications for its savings accounts by non-Muslims last year after the Barclays rate-fixing scandal.

In numbers

275: The number of Islamic financial institutions in the world.
75: The number of countries where they have a presence.
US$1.357 trillion: The value of the global Islamic finance services industry by the end of 2011.
US$4 trillion: The projected value of the global Islamic finance services industry by 2020.
£200m: The value of the planned Islamic bond being unveiled by David Cameron today.
11th: The ranking of the UK (up 4 places from 2011) in the Global Islamic Finance Report which weighs up variables like the number of institutions involved in Islamic finance industry, the size of Islamic financial assets and the regulatory and legal infrastructure.

bay ‘al-mu’ajjal: Instant sale of an asset in return for a payment of money (made in full or by instalments) at a future date
gharar: Describes a risky or hazardous sale, where the details of the sale contract are unknown or uncertain
ijarah: Leasing contract
istisna’: Refers to an agreement to sell a non-existent asset, which is to be manufactured or built according to the buyer’s specifications and is to be delivered on a specified future date at a predetermined selling price.
mudarabah: Profit and loss-sharing
musharakah: Joint partnership
qard hasan: Interest-free financing
riba’ : Usury
sharikat al-‘aqd: Contractual partnership
sharika al-milk: Proprietary partnership
sukuk: Islamic bonds
tahawwut: Hedging
takaful: Islamic insurance
wadiah: Safe custody
wakala: Investor entrusts an agent to act on his behalf
zanniyyat: probabilistic evidence