Last week, as London become the first non-Islamic country to host the ninth World Islamic Economic Forum (WIFE), David Cameron used this platform to announce Britain’s campaign to launch London as one of the world’s “great capitals of Islamic finance”, by being the first non-Muslim country to issue an Islamic bond, traded on a new FTSE Islam Market Index.
The sovereign ‘sukuk’, which is Arabic for bond, will be governed by Sharia law which promotes ethical investment principles transacting tangible investments. Unlike bonds or Government gilts, usury, the practice of charging interest on investment, is strictly prohibited. Instead the lender will get a return on the underlying asset, which is usually above market value. It is about entering a long term investment between financier and beneficiary where the debt is shared throughout, and the eventual profit or loss made from the endeavour on completion is fairly distributed.
Islamic financing is not a new concept to Britain; we have seen investment in London’s iconic Harrods store, Manchester United Football Club, and most recently the development of the Shard. With Islamic finance the focus is more on the type of project development and end profitability. In fact, the only similarity to traditional bonds is that it is a fixed term source of lending/borrowing.
So, why are we promoting Islamic Finance now? Britain is finally in recovery and, like most western countries, needs inward investment in order to stimulate the capital account, achieving employment and thus sustaining growth. Investment opportunities have been exhausted in Europe and the UK and therefore the Government are looking further afield to the Far Eastern sphere.
The Muslim community represents a vast opportunity of untapped investment; the global market in Islamic finance has soared by 150% in the past seven years, and it is estimated to grow to be worth about $1.3 trillion next year. Britain itself is home to a large Muslim minority, with 2.8 Muslims living in Britain alone with a combined spending power of £20bn. However, it has been found that they tend to deal their finances outside the normal high street bank. The Islamic Bank of Britain reported a 55% increase in new bank account openings in recent years, meaning the demand is readily available for participating institutions.
So why should Muslims invest in a non-Muslim investment? The Eastern World currently dominates Islamic Finance with countries such as Dubai, Malaysia, Turkey and Kuala Lumpur who are actively trade Islamic investments from local lenders. The benefit of investing in Britain is that it gives access to global opportunities, supported by state of the art trading infrastructure and world class regulations.
At investor level, the British sukuk is an alternative investment to diversify portfolios, and adds ethics into what some investors may still see as distrustful industry following the global crisis, stemmed from speculation, which doesn’t exist in Islamic finance, and the LIBOR fixing scandal.
That doesn’t mean that there is no risk attached; Islamic investing is also prone to default risk or bubbles bursting without warning. In addition to this, the audit standards have also been criticised as it seems that the standards are dictated by bank-employed sharia advisers which can create a conflict of interest.
In 2006 Gordon Brown had the same idea; however the consumer perception of Islamic Finance in the wake of 9/11 was that it contained some link to terrorism, and therefore the launch failed to take off.
Britain has evolved from 2006, attitudes have changed and investors are more open to fresh investment opportunity, it is also important for London to remain relevant by maintaining their status of being the centre of global finance, which involves identifying a niche opportunity and promoting it widely, as Cameron is doing.