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Faith-Based Investing
Banks gain by keeping Islam in mind
10:00 PM PDT on Saturday, March 15, 2008
LONDON – After taking a battering from the global credit crisis, London has a potential ace up its sleeve as it seeks to restore its reputation as a global financial center: its premier position in the Islamic banking industry.The British government is considering whether it will issue a sovereign Islamic bond, or “sukuk,” a new avenue into a market that Standard & Poor’s estimates eventually will reach $4 trillion.
“It will further underline London as an international Islamic financial center,” said Humphrey Percy, the chief executive of the Bank of London and the Middle East, one of four Islamic banks in the British capital.
“It will be the first hard- currency, highly rated, government sukuk to be issued. These are all milestones,” Percy said at the bank’s headquarters in the City of London, the capital’s financial district, where it opened six months ago.
Based on Tangible Assets
Islamic financing is increasingly seen as a key support to London’s reputation as a financial center, which took a beating recently with the failure of Northern Rock PLC and criticism of proposals to raise taxes on wealthy expatriates living here.
“Islamic finance is a tool that the government realizes it has in its hand, which it can utilize to re-establish some clear blue water between themselves and Wall Street,” said David Testa, chief executive officer of Gatehouse Capital PLC. Gatehouse expects to receive its license to become London’s fifth stand-alone Islamic bank within weeks.
As the fallout from the U.S. credit crisis continues to take its toll on banking, interest in banking that conforms to Shariah, or Islamic law, is growing. It forbids interest and requires deals to be based on tangible assets, which have provided some insulation from credit turbulence.
Shariah-compliant products attempt to replicate the concept of interest through cost-plus transactions, leasing arrangements or by linking payments to returns on underlying assets. The process is normally blessed by a board of religious scholars affiliated with a bank.
While more than two-thirds of Islamic finance business originates in the Middle East, the region is increasingly looking to international capital markets to finance projects. A $1.5 billion sukuk issue from Dubai Ports World and arranged by London-based Barclays Capital last year allocated 60 percent of its bonds to Western buyers.
‘Huge International Interest’
A British government sukuk would increase liquidity in the market and expand the secondary commercial market in the “takaful,” or Islamic insurance, sector.
“Sukuk and other bonds would absolutely explode,” David Lewis, lord mayor for the City of London, told leading Islamic bankers at a recent meeting. “If we in London could promote such a market, there would be huge international interest.”
Unlike conventional bonds, a sukuk gives investors a share in an underlying physical asset, such as leased land, as well as the income that it generates. Takaful, where resources must be pooled, benefits because a sukuk offers a tradable fixed-income component that was previously lacking.
The global sukuk market grew 75 percent to reach $85 billion in the first half of 2007, the most recent figures available.
The potential of the commercial sukuk market was demonstrated in December by the launch of a $300 million convertible bond for Tamweel, the second-largest mortgage lender in the United Arab Emirates. Tamweel said its bond issue, managed by Barclays Capital, was oversubscribed within hours.
Rodney Wilson, chairman of the London-based Institute of Islamic Banking and Insurance, noted that some other deals had been put on hold — UAE-based Dana Gas postponed its $1 billion sukuk until September because of credit-market weakness, while First Gulf Bank of the UAE and Bahrain’s Ithmar Bank deferred their issues.
“On the other hand, there is no Islamic financial institution which is in trouble,” Wilson said.
Ahead of the Curve
Britain has worked to position London to take advantage of the rapid growth in wholesale Islamic banking. It is the only Western country among the top 15 for Shariah-compliant assets, ranking ninth, according to industry group International Financial Services London.
Both retail and wholesale services have grown rapidly since the Islamic Bank of Britain became the first domestic bank to cater exclusively to the country’s 2 million Muslims just four years ago. There are now also some 23 conventional banks, including Lloyds and HSBC, offering Islamic products.
In contrast, France, with a Muslim population of more than 5 million, has just four conventional banks offering Islamic products.
The United States is the only Western country that comes close to Britain. It has about 20 Islamic banks, but they are focused predominantly on domestic retail operations, not high finance.
The market is not without problems. Shariah scholars disagree about what constitutes compliance with Islamic law. One of the leading scholars, Sheik Mohammed Taqi Usmani, recently rattled the market by saying 85 percent of sukuk are not Shariah-compliant because they were too much like conventional interest-bearing bonds.
Wilson said that a consensus would likely evolve with time.
“I don’t really see any huge problems ahead,” he added. “I expect it will expand into other areas, and more conventional institutions will join, which is what we are seeing now.”
WHAT’S BANNED: Shariah law forbids the giving or receiving of “riba,” or interest, and requires deals to be based on tangible assets. Earning money from companies involved with alcohol, tobacco, gambling and pornography is also off limits.
WHAT IS IT: A “sukuk,” or form of bond, is an asset-based investment in which the investor owns an undivided interest in an underlying tangible asset that is proportionate to the investment. Money raised by the issue of the sukuk note is used to invest in an underlying physical asset, such as leased land.
LONDON AHEAD: The British capital has the largest pool of Shariah-compliant assets in the West. It also has more wholesale and retail banks serving the sector than any other Western country.
POTENTIAL PITFALLS: Debate among Shariah scholars worldwide about whether recent deals conform with Shariah law could complicate the industry’s growth.
The Associated Press
