Principled products
29 Sep 08
What opportunities does Islamic finance create for UK institutions?
by Omar Shaikh
Islamic Finance is a global industry with international established financial institutions competing for assets estimated at $750 billion (£413 billion) in 2006 and expected to exceed $1 trillion (£552 billion) by 2010. Its growth is focussed in four sectors: asset management, capital markets (sukuk), insurance and retail banking. A range of Shariah-compliant products have been developed, but a complete spectrum equivalent to conventional finance is not yet available. This creates a strong opportunity for business practitioners and regulators to facilitate product innovation and be seen to lead the market.
Asset Management
Estimated investable assets in 2006 of $140 billion (£77 billion) are expected to grow 25 per cent a year reaching $450 billion (£258 billion) by 2011. Islamic asset management includes objectives of ethical and social investment.
The UK can meet these needs. Edinburgh is prominent in European fund management and is seen as a key financial centre Scotland’s strong heritage in ethical finance is a prime fit for Islamic finance, which can be viewed as a sub-set of ethical finance. The “mutual trust” background of many Scottish companies such as Scottish Equitable, Scottish Life and Scottish Widows also lends itself to long-term investing based on prudent principles with an ethical bias.
Capital Markets
“Sukuk” is the Arabic name for financial certificate and can be seen as the Islamic equivalent of bonds – the key difference is that sukuk are asset backed. The sukuk market grew from
$1 billion (£552m) in 2001 to $36 billion (£20 billion) in the first nine months of 2007 and in the next year is projected to increase to over $80 billion (£44 billion).
In June 2008 HM Treasury responded to a sukuk consultation. It aims to issue a bill-like sukuk, with a maturity of one to six months, in a rolling programme worth up to £2 billion. It will be based on contracts that have been widely accepted as Shariah-compliant.
Insurance
Takaful is Islamic insurance, based on the principles of mutual support. Takaful premiums globally are expected to grow from $2 billion (£1.1 billion) in 2005 to $10 billion by 2015 (£5.5 billion), which has brought major global insurers into the market. The UK’s first takaful provider launched retail products in July, targeting a market forecast to be worth $269m in premiums in the UK by 2015.
Retail Banking
In retail banking, strong potential is seen in all products available in conventional banks including current accounts, savings accounts and mortgages. With more than 1.4 billion Muslims worldwide, Islamic finance presents a captive value proposition.
The UK has the most established Islamic finance retail products in western Europe. Its Islamic mortgage market, worth £164m in 2004, is forecast to be worth over £600m in 2009. A survey by the Times in May 2007 reported there are 5,000 UK Muslim millionaires owning assets of over £3.6 billion.
The UK market
Islamic finance remains concentrated in Bahrain, Dubai and Malaysia, but it is taking hold in the financial centres of the world – with the UK positioning to be a premier global hub.
The UK, with its successful track record in Islamic finance and Government support, has become the hub for Islamic finance in Western Europe. Several conventional banks are providing Islamic products through “window” operations (see previous article) and in 2004 the UK saw the establishment of the OECD’s first stand-alone wholly Islamic retail bank, the Islamic Bank of Britain. The UK has four stand-alone Islamic wholesale banks, and one retail.
In private equity, too, the UK has seen dramatic recent developments: the Aston Martin deal in 2007 was a pioneering Islamic private equity deal. In addition there have been a number of Islamic real estate deals.
Many challenges remain, particularly over standardisation of product terms and certainty over Shariah interpretations. But to those involved are committed to overcoming these challenges. n
OMAR SHAIKH CA is a board member of the Islamic Finance Council, a body established in Scotland to promote the global Islamic finance industry. He is also on the UK Treasury Islamic finance sub-committee and is Ernst & Young’s Islamic finance expert.