COMMENT

July-August 2006
NewHorizon
The revival of Islamic finance practices in modem times is a phenomenon of the last three decades. Though it is a relatively new way of modem financial management based on religion attached to ethical values, it has already crossed significant milestones in this short span of time. The volume of transactions in shariah-complaint financial products and services is now reaching billions every month and it is growing at the rate of 15 -20% per annum, according to many estimates. There are already regional Islamic financial centres developed at Bahrain, Dubai and Malaysia with London and Singapore now also in the running. Remarkable changes in company laws as in Malaysia have taken place to accommodate the Islamic financial services within the mainstream financial system. This movement is taking place in many other jurisdictions as well, such as the UK.

Despite all these developments, Islamic finance is still in an infancy stage and in the process of evolution; there are many issues that need to be addressed on an urgent basis to pave way for ensuring its growth on a stable and sustainable basis. These include legal, tax and regulatory matters. Especially, legal issues that are of prime importance in structuring of Islamic finance transactions and addressing risk; as in many jurisdictions where shariah requirements are not compatible with national law; there is also the additional administrative burden of regulation on Islamic financial institutions accompanied by extra cost to them. Consequently, differences may emerge in reporting and corporate governance structures in different countries where Islamic financial institutions operate, mak­ing disclosure of information and its comparability even more difficult.

Other challenges include the build­ing of other international liquidity management centres (in addition to Bahrain and Labuan) to facilitate the use of the huge excess liquidity in Middle-Eastern countries where the demand for Islamic financial prod­ucts is at an all-time high. Lack of mature secondary markets for Islamic investment securities, which are currently traded on ‘buy and hold” principles and redeemed at maturity is also another issue, which requires greater focus. The volume of Sukuk issues is dramatically increasing, as there is a growing trend to use these instruments for financing infrastructure projects in Muslim-majority countries.

In the first half of 2006 Sukuk issues exceeded the ceiling of $12 billion of 2005. But, this trend only favours big institutions that have high liq­uidity and big investor base. Smaller institutions and investors are unable to go along this path due to the lack of tradability of these securities, which does not conform to their risk appetite.

The integration of Islamic finance within the mainstream financial sys­tem will get impetus from the devel­opment of a centre in London for global Islamic finance, with a satu­ration of human resources in the form of well-trained professionals in banking, finance, legal and tax; capital markets, where no symptoms of monopoly exist. It also has well-established financial infrastructure and an independent regulatory framework and close links with the Muslim world. Currently around 30% of all international financial deals are done in London and it is no different for Islamic financial trans­actions.

The UK Government is extremely supportive of Islamic finance’s growth and is committed to strengthen London’s ambition and reinforcing its claim to becoming a gateway for Islamic international trade and finance. This was reiterat­ed in the key note speech by the Rt. Hon. Gordon Brown, the UK Chancellor of the Exchequer at a recent conference organised in London by the Muslim Council of Britain; the event was also attended by distinguished guests from UK and Middle-Eastern countries. Various matters concerning Islamic financial services industry ranging from tax, regulatory and legal issues to supervisory structures, develop­ment prospects and initiatives were discussed.

Tejoori, an investment company was listed on Alternative Investment Market (AIM) in London in 2nd half of 2006. In July 2006, GFI, one of the world’s largest interdealer bro­kers, announced establishing a London-based trading desk to make a secondary market in Sukuk (Islamic bonds). HSBC Amanah, Alburaq (a subsidiary of Arab Banking Corporation), Ahli United Bank, Lloyds TSB and Bristol & West Building Society have been offering Islamic products and serv­ices for some time in the UK. European Islamic Investment Bank (EIIB) and the Islamic Bank of Britain (IBB) are already functioning as full-fledged Islamic banks. IBB is expanding its operations, starting with one branch in 2004 and now having a network of seven branches with a diversified portfolio of products to meet the needs of both the individual as well as the corporate customers.

The pick-up in Islamic retail prod­ucts has already got an intensive media focus. There is huge take-up in Islamic mortgages in last three years and this trend is likely to con­tinue in the foreseeable future. Some applications for licensing of other Islamic banks are under process at Financial Services Authority (FSA).

Late Muazzam Ali, chairman and founder of The Institute of Islamic Banking & Insurance had the immense foresight to choose London to establish the first educational, training and research centre for the Islamic financial services industry -recognising London’s importance and unique financial expertises and supporting infrastructure. Some heavy-weight supporters of Islamic finance like Sir George Eddie, exgovernor of Bank of England had close discussions with Late Muazzam Ali. Sir Eddie played a vital role in paving the way for introduction and growth of Islamic finance in UK.

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