At last month’s World Islamic Economic Forum in London the British prime minister, David Cameron, said the United Kingdom’s capital aims to become a top centre of Islamic finance – echoing similar ambitions voiced by Dubai, Malaysia and others.
So far, there does not seem to be much more than talk going on in the financial capitals of the world and it is unclear exactly where each country is in the race to dominate the fast growing Islamic finance sector, valued currently at around US$1.6 trillion.
There was $275.2 billion of global sukuk outstanding as of August 31, according to figures from Malaysia’s finance ministry. Ernst & Young forecast in a December report that international demand for Islamic debt will reach $950bn by 2017.
And Islamic finance has been expanding faster than conventional finance according to the Islamic Finance Secretariat, a British lobby group.
The Islamic Corporation for the Development (ICD) of the Private Sector,a Jeddah-based body, has launched a series of numerical studies of Islamic finance to help policymakers to develop the industry. It is collaborating with Thomson Reuters to produce the finance studies, known as the Islamic Finance Development Indicator (IFDI).
The IFDI will track five areas of industry development, which can be broken down by country: social responsibility, quantitative development, governance, knowledge and awareness.
There are many issues that need to be resolved if Islamic finance is to grow into the truly global industry that most analysts expect it to. These challenges include the substantial differences between the Arabian Gulf and South East Asia in the design and use of Sharia-compliant financial products.
Analysts also warn that the industry has often become narrowly fixated on measures such as asset growth.
The expansion of Islamic finance education is also an important part of the industry’s development.
According to a study by the ICD, Britain is at the top of the list with 60 institutions offering Islamic finance courses and 22 universities with similar degrees. Malaysia, the UAE and Pakistan come next.
A total of 655 research papers were issued globally on Islamic finance in the past three years, of which 354 were peer-reviewed. Malaysia published 169 papers in the period and Britain and the United States published a combined 184.
The country’s lenders provide Islamic financing only via foreign-incorporated units, which is hindering growth.
Japan, which introduced equal tax treatment for Islamic bonds last year, is in a similar position to Hong Kong, which hasn’t made much progress in forming a Sharia finance hub because of lack of local demand and familiarity, according to Davide Barzilai, a partner at Norton Rose Fulbright in Hong Kong.
“Japan needs to allow the banks there to facilitate Islamic transactions instead of limiting them to undertake such activities outside the country,” Badlisyah Abdul Ghani, the chief executive at CIMB Islamic Bank, a unit of Malaysia’s second-biggest sukuk arranger this year, told Bloomberg News. “A market requires players. Without players there are no markets.”
Mr Barzilai said: “Islamic finance in Japan is being purely driven from the underlying projects that their companies are involved in. It might be a joint venture with a Saudi entity, which has a Sharia-compliant component. I don’t think it will be coming from the Japanese side unless there’s a specific requirement or reason.”
There are only 183,000 Muslims in Japan, although interest in Sharia-compliant finance has recently experienced a revival and is gaining popularity among Japanese companies operating in Malaysia and other Islamic countries.
Mohd Effendi Abdullah, the head of Islamic markets at AmInvestment Bank said: “There’s a good chance Japan may amend the relevant laws to enable [state-owned banks] to issue sukuk and follow the UK’s footsteps to strengthen its involvement in Islamic finance.”
The world’s biggest sukuk market, Malaysia is not slacking off in its efforts to maintain its lead.
Last year, Malaysia’s securities commission revised its guidelines for screening equities that qualify for Islamic investment, moving them closer to those used in the Gulf.
The central banks of Malaysia and the UAE are working on a fund passporting mechanism that will facilitate sales of funds from one country into the other.
The plan is part of a bilateral agreement signed between the central banks of the two countries, aimed at building closer economic ties with a focus on Islamic finance.
The two countries have a total of more than 270 Islamic funds, representing close to a third of the entire Islamic funds sector globally, according to data from Lipper, a Thomson Reuters service.
The Malaysian commission also signed an agreement recently with regulators in Singapore and Thailand to encourage cross-border offers of investment funds.
Malaysia’s Malayan Banking, the country’s largest lender, has also launched an Islamic asset management unit to cater to growing investor appetite for Sharia-compliant investment products.
The Islamic asset management sector is gradually making a comeback after years of stagnation, with a total of 88 funds liquidated globally in the past two years as slumping equity markets reduced investor interest.
The kingdom has been perhaps surprisingly quiet in championing its credentials to be an Islamic finance hub. However, the Islamic Corporation for the Development of the Private Sector (ICD) has launched a series of Islamic finance numerical studies.
“Detailed empirical research and analysis is the only way to evaluate the impact of the industry on the wider society, and convince non-Muslim stakeholders of its value proposition,” said Khaled Al Aboodi, the ICD chief executive.
A future IFDI study of governance in Islamic finance will measure industry-specific regulations, the number of scholars and the board memberships they hold, as well as information disclosure.
Turkey’s Islamic finance industry is being reshaped as banks widen their product range and new competitors prepare to enter the market, according to Thomson Reuters.
Promoting Islamic finance in Turkey, the world’s 17th largest economy with a predominantly Muslim population of 76 million, is part of government plans to boost commercial ties with the Gulf and diversify the country’s investor base.
Assets at Turkey’s Islamic banks, known locally as participation banks because of political sensitivities in the constitutionally secular country, have grown sixfold over the past decade as their combined branch network has more than tripled.
Last year Islamic banks reached a combined $36bn in assets, representing a 5 per cent share of total banking assets. This was a 25 per cent rise from a year earlier, compared to 13 per cent growth for conventional banks.
Islamic bank assets could reach between $80bn and $120bn by 2017; the lower estimate would give them a 9 per cent share of total banking assets, on track to meet a government target of 15 per cent by 2023.
For this to occur, however, the industry will need to do more to educate customers.
A nationwide poll of 2,759 Turks conducted for the study found that 41 per cent said better education about Islamic finance was needed. Among existing Islamic bank customers, 39 per cent said they had little understanding of industry concepts.
Still, 38 per cent of conventional bank customers would consider switching to Islamic banks, which follow religious principles such as a ban on interest payments.
Of those interested in Islamic banking, a third would consider switching even if their capital was not guaranteed.
Dubai has already flagged its drive to become a global centre for Islamic business. This includes plans to develop a set of standards, not just in finance but also in other areas such as halal food processing that is designed to become accepted internationally.
The UAE will also set up an independent authority that will supervise the country’s Islamic finance industry, backed by specific legislation, according to the central bank governor Sultan Al Suwaidi.
The Islamic Development Bank (IDB) also said it would set up a $10bn sukuk issuance programme on the Nasdaq Dubai exchange. The emirate’s exchanges have so far listed $12.5bn of sukuk and the total is expected to reach $16bn by the end of the year.
Dubai will also host next year’s World Islamic Economic Forum, also called the “Islamic Davos” after the World Economic Forum’s prestigious annual event.
Islamic finance has already helped to transform London’s skyline, with Qatari money part-funding the Olympic village used at last year’s Olympics and the 310-metre-high Shard building now towering over the River Thames.
And more than 20 UK banks currently offer Islamic financial products, while 49 Islamic bonds, or sukuks, with a total value of $34bn, have been listed over the past five years on the London Stock Exchange.
When Islamic finance is growing 50 per cent faster than traditional banking and when global Islamic investments are set to grow to £1.3 trillion [Dh7.61tn] by 2014, “we want to make sure a big proportion of that new investment is made here in Britain,” the prime minister Mr Cameron has said.
A new “Islamic index” on the London Stock Exchange has been announced and Britain will issue an Islamic bond.
“This means the creation of a new way of identifying Islamic finance opportunities – a world-leading Islamic Market Index,” Mr Cameron explained.
Meanwhile, the Association of Sharia Scholars in Islamic Finance (Assif), a British-registered charity, says it will address a long-standing problem in the industry: the lack of a clear, commonly recognised set of qualifications for scholars.
Assif said it will have a governing council of between 10 and 30 scholars, and already counts prominent scholars from the Arab world, Malaysia and Britain as trustees and co-founders.
These include Bahrain’s Sheikh Nizam Yaquby, Syria’s Abdul Sattar Abu Ghuddah, Saudi Arabia’s Mohamed Ali Elgari, and Malaysia’s Mohamad Akram Laldin. Together they share close to 270 seats in Sharia boards around the world.
* With agencies