London is emerging as the key centre for Islamic finance outside of the Middle East as financial institutions clamber to become part of a growing market. Currently it is estimated that Islamic banking manages funds of $200 billion. It is predicted to increase by up to 15 percent a year and be worth a trillion dollars by 2010. Although Shariah-compliant finance has existed in some form for hundreds of years the world's first Islamic bank was founded in 1975 and it is only in the last five years that this area of finance has surged. The latest figures from the International Financial Services London show there are 23 banks, nine fund managers and a number of law firms in the city now offering Islamic compliant services. “When you look at London what you have is a global financial centre that makes it easier to trade with other markets. Taxation issues have been dealt with, the regulatory authorities are sending out encouraging messages and there is good co-operation with other banks, particularly in the Middle and Far East,” said Mohammad Shafique of the Institute of Islamic Banking and Insurance in London. The UK government has also created an Islamic Finance Expert Group with representatives from the industry, the City and Muslim organizations to advise on future opportunities. Further evidence of London's growing role in Islamic finance is shown by the UK being the only western country to feature, at number 10, in the IFSL global ranking of Shariah-compliant assets by country. The UK's first stand along Islamic Bank, Islamic Bank of Britain, opened in 2004 and there are now five totally Shariah-compliant banks registered by the Financial Services Authority, the UK's banking regulator. Regarded for many years as outside the mainstream, Islamic finance has been boosted by a number of factors. Firstly, at a very basic level, there are more Muslims in the world seeking mortgages, investments, bonds and specialist finance products. What used to be a sector for high net worth individuals is now open to the fast growing Muslim middle classes. Secondly, economic growth in the Middle East, fuelled by high oil prices, has created an increased demand which local financial markets have been unable to keep up with. As a result Middle Eastern investors are looking for suitable alternatives. Next year sees the world's first conference fully focused on exploring the financial relationship between Europe and the Middle East. Islamic Investment World 2009 next May in Geneva is taking place as a result of demand. “Investors globally are seeking a safe haven from sub-prime debt, excessive volatility, out of control inflation and central bank meddling. Private equity, structured products, hedge funds and other alternative opportunities are rapidly emerging and catching the eye of the biggest investors in the Middle East,” said a spokesman for the event. Global banking giants such as HSBC, Barclays Capital, Royal Bank of Scotland, BNP Parabas and Deutsche Bank, are putting their weight behind Islamic finance as they realize many products have a wider appeal than the immediate Muslim community. But it is London that has taken a lead for various reasons. It has been a major financial centre for centuries and is regarded as open to innovation and ideas. The UK was the first member of the EU to authorize Islamic banks. English law is highly regarded throughout the world. It is the preferred jurisdiction for many Islamic transactions. Also the UK government is actively encouraging the growth of Islamic finance. It has introduced a number of changes to support the growth of Islamic finance. Most notably it acted quickly to introduce changes so that Islamic mortgages would not be subject to double taxation. Indeed the FSA is taking a leading role and actively encouraging expansion. “Islamic finance is a fast growing force in the world economy. The FSA has an open and principle-based approach to regulation that offers the right environment for it to flourish in the UK. There is huge potential for expansion,” said FSA chairman Sir Callum McCarthy. In April this year the London Stock Exchange listed its maiden Sukuk, a Shariah-compliant bond. There are now at least eight and the government is expected to sell its own Sukuks soon. “The UK has taken some commendable steps to allow Sukuk financing,” said Arul Kansasamy, head of Islamic Banking at Barclays Capital. The FSA describes London as “a center of choice for listing Sukuk by establishing the world's first secondary market for Sukuk.” Sukuk trade volumes in London now exceed $2 billion. Islamic finance is based on the principles of Shariah law and operates without the use of interest. So the products offered are structured in a different way to those provided by conventional banks and financial institutions. There are also laws regarding the type of business financial institutions can deal with. Investment in business involved with arms, tobacco, drugs, alcohol, among others, are not permitted. They can profit from customers buying a property using different schemes whereby the customer is charged rent, for example. They retain a clearly differentiated status between shareholders' capital and clients' deposits to make sure profits are shared.
