LONDON, Jan 21: The city of London is emerging as the key Western centre for Islamic finance against the backdrop of a three-fold growth of Islamic financial services over the past decade to $53bn in 2006.
Standard & Poor’s has estimated that the potential market for Islamic finance could be $4 trillion, over seven times its current size.
According to a new report by International Financial Services Limited (IFSL) on Islamic Finance co-sponsored by UK Trade and Investment the cluster of expertise in London is represented by 23 banks, nine fund managers and a number of international law firms offering Islamic services. In addition, there is a secondary market in Sukuk valued at $2bn a month and a growing market for retail mortgage business.
IFSL’s report also found that daily trading in commodity-based agreements through the London Metal Exchange was a key mechanism for the management of assets and liabilities by Islamic financial institutions and the 23 UK banks outnumber more than four times those of any other country in western Europe: Switzerland has five and France and Luxembourg each has four.
The UK is also ahead of the rest of the Western Europe in establishing fully ‘Shariah’ compliant banks with three of the 23 UK banks having set up there since 2004. These are Islamic Bank of Britain, the European Islamic Investment Bank and the Bank of London and the Middle East.
Duncan McKenzie, IFSL’s Director of Economics said, “Evidence of London’s growing role in Islamic finance is shown in the UK, being the only western country to feature prominently - 9th with $10bn - in a global ranking of Shariah compliant assets.”
UK educational institutions are taking the lead in positioning the UK as a leading centre of learning in Islamic finance. The Securities and Investment Institute, the Chartered Institute of Management Accountants and Cass Business School have each worked collaboratively with overseas partners to offer qualifications that can be accessed by students around the world.
The global market for Islamic financial services, as measured by Shariah compliant assets, is estimated to have grown by over 10 per cent a year from about $150bn in the mid-90s.
Islamic commercial banks accounted for 75 per cent of the assets ($397bn), and investment banks 13 per cent ($66bn). The balance is made up by outstanding Sukuk ($42bn); assets of equity funds and other off-balance sheet investments ($14bn) and assets of Takaful providers ($10bn).
The global ranking of firms with Shariah compliant assets that appeared in the November 2007 edition of the ‘Banker’ included reporting from three UK firms, largely based on HSBC Amanah.
The IFSL’s Islamic Finance working group is taking a leading role in the promotion of Islamic financial services available from the UK. The group is working closely with private sector and the government, particularly UKTI and the City of London Corporation.
The UK government is of the view that the developing Islamic financial services help to combat social exclusion while also giving additional weight to London’s status as a global financial centre.
Central to the success of the UK offering and maintaining London as a key Western Islamic finance centre is the establishment of an enabling fiscal and regulatory framework.
Key initiatives have included the removal of double tax on Islamic mortgages; the extension of tax relief on Islamic mortgages to companies; reform of arrangements for issues of bonds so that returns and income payments can be treated ‘as if’ interest; and ensuring that regulatory treatment of Islamic finance is consistent with its statutory objectives and principles.