By Robin Wigglesworth and Elaine Moore
London has been a natural hub for sharia-compliant industry, say Robin Wigglesworth and Elaine Moore
Islamic finance has come a long way since an inauspicious birth five decades ago in Mit Ghamr, a devout village on the outskirts of Cairo. It is now a well-established, vibrant industry of more than $1tn, with footholds across the world.
The growth has been particularly strong in the past decade. The ideas may have developed in Egypt but Malaysia and the oil-rich Gulf have transformed a cottage industry into a small but thriving niche of the international financial system. The rapid expansion has attracted interest in the UK, which will this week for the first time host the “Islamic Davos”, or the World Islamic Economic Forum – where David Cameron, prime minister, will announce that his government will be the first outside the Muslim world to issue a bond that adheres to the principles of Islamic jurisprudence.
Islam prohibits interest, which is deemed haram or sinful, and stipulates that all investments should be based on “real” assets, such as houses, factories and roads. Islamic financial products are structured to mimic conventional ones, such as mortgages, but adhere to these strictures.
Islamic bonds, or sukuk, have been one of the more high-profile examples of the industry’s growth. In 2003, $3.5bn of international sukuk were issued. Sales last year hit a record of $44.8bn, according to data provider Dealogic.
London has been a natural hub for the Islamic finance industry, thanks to its global outlook and the numbers of skilled lawyers, bankers and accountants needed to structure, draft and design products. But successive UK governments have long sought an even larger role for the City.
The last Labour government started laying the ground for a domestic Islamic banking industry to cater for the financial needs of UK Muslims. Islamic lenders sprung up, and the government planned to help their growth by issuing sukuk bonds.
Alistair Darling planned in 2008, when he was chancellor, to use his Autumn Statement to announce a £2bn programme to issue short-term sharia-compliant government debt. But Lehman Brothers collapsed, triggering the global financial crisis and forcing the government to focus on other matters.
Although this was understandable, “there was a feeling that perhaps the UK was no longer focused on the industry” says Farmida Bi, a partner and Islamic finance expert at Norton Rose, a law firm.
The current government has become keen to burnish the City’s credentials as a hub for the industry – and, above all, to attract investment in infrastructure projects from wealthy Gulf countries in particular.
The coalition set up an Islamic finance task force this year to examine ways to do this and many experts argue that issuing an Islamic bond would be the best way to underscore commitment to the industry.
The growth of domestic Islamic banking has been a disappointment. Despite high hopes that British Muslims would flock to the sharia-compliant institutions, interest has been more limited than expected.
Several lenders have had to be recapitalised and Qatar had to bail out the Islamic Bank of Britain in 2010 because of mounting losses.
Most tellingly, HSBC last year decided to close its Amanah retail operations in the UK.
Many experts hope that a UK sukuk issuance could contribute to a reinvigoration of the industry.
“The demonstration effect could be tremendous,” says Neil Miller, global head of Islamic finance at Linklaters, a law firm.
“It will be good for the credibility of the UK as a European hub and home for Islamic finance.“
Copyright The Financial Times Limited 2013
(c) 2013 The Financial Times Limited