By Peter Apps
LONDON, July 23 (Reuters) – From Africa to Paris to Britain’s former industrial heartland, Islamic law-compliant investment products are springing into existence as financial centres try to compete for a slice of the Middle East’s colossal new oil revenues.
With conventional sources of cash depleted by the credit crunch and fears of recession around the developed world — and with high oil and food prices limiting growth — oil-rich Gulf markets are one of the few reliable sources of finance.
With dollar crude prices soaring to almost double their level of a year ago — and Western financial woes seen deepening — a new intensity has gripped Islamic finance growth.
Estimates of the total size of assets held under Islamic finance rules vary, but the Asian Development Bank estimates it at around $1 trillion, with growth of 10 to 15 percent a year.
It is no surprise then that cities with substantial Muslim populations and connections as diverse as Singapore and Hong Kong, London and Birmingham and even Paris are vying to act as key centres of expertise in the new boom.
“The French have lagged the British…but recently the French government signalled a change in attitude,” ratings agency Standard & Poor’s said this week.
“By preparing the ground for Islamic finance, France can help financial innovation and benefit from the deep pockets of Middle Eastern investors as liquidity has dried up elsewhere in the global financial markets.”
It is unclear to what extent, if at all, the vast sovereign wealth funds being built up by Gulf oil produces might be managed under the strictest principles of Islamic law, which prohibits the use of interest — and therefore investment in conventional banks, alcohol or pornography producers.
But more and more takers have been coming forward with products to target those who demand sharia products.
In June, investment bank Investec announced a partnership with a Saudi investment provider to produce the first sharia-compliant fund targeting Africa. Other funds are following.
For now, two thirds of the worldwide Islamic sukuk bond market — an estimated $100 billion — is based in Malaysia where the industry first took off.
Singapore and Hong Kong are growing as are the emerging Gulf financial centres, where around a quarter of all banking is estimated to be managed according to sharia principles.
Outside Asia and the Middle East, Britain — and London in particular — is seen as by far the leader, with the London secondary sukuk market — trading Islamic debt mainly issued by Asian and Middle Eastern firms — worth some $6.5 billion.
“The UK government has done a far greater amount than any other Western government to aid Islamic finance,” David Testa, chief executive of new UK Islamic bank Gatehouse said.
But other potential rivals are seen emerging.
“London might be the world’s leading international financial centre — but there are plenty of other cities that would like to be, or at least would like to take some of our business,” said Britain’s Economic Secretary to the Treasury Kitty Usher at the World Islamic Banking Conference in London earlier in the month.
“And that is as true in Islamic finance as it is in any other sector.”
Partly as a result, Britain intends to issue its own sovereign sukuk debt in a rolling programme worth around 2 billion pounds — although it said legal barriers still remained and a final decision would be made later in the year.
“LIKE SILICON VALLEY”
Britain’s Treasury hopes that, if issued, a British sovereign sukuk would provide a benchmark to base other local products off. It has also moved to help standardise qualifications and training.
But S&P says France looks to already be trying to close the gap with Britain, looking to reform its financial laws to allow easier issuance of Islamic financial instruments.
Regulatory and legal hurdles have dogged several countries trying to move into Islamic finance.
Thailand had planned to issue its first $500 million Islamic sovereign bond this year but scrapped the plan because more preparation was needed [ID:nBKK20836].
But it intends to push ahead with Islamic bonds from state enterprises such as the airline and power utility.
Britain’s second largest city and one-time industrial centre Birmingham, home to a quarter of a million Muslims as well as the European Union’s first stand-alone Islamic retail bank, is eagerly rebranding itself as a key European Centre for retail Islamic finance, targeting mainly local Muslims.
“It’s like in America’s Silicon Valley — you will get clusters of expertise in certain areas,” said Stephen Amos, spokesman for the Islamic Bank of Britain, which holds $256 million and is based on the outskirts of the city.
“The two areas of expertise are always going to be London… and hopefully Birmingham.” [ID:nL09669160]
Western interest in Islamic banking is going beyond simply trying to attract wealthy Islamic investors. In the Gulf itself, Western institutions are emerging as the main buyers of Islamic instruments, keen to access the growth of Gulf firms.
Law firm Trowers and Hamlins said Islamic compliant sukuk bond issuance in the Gulf jumped 17 percent to a record $17 billion, increasing more than 20-fold over the last five years. Western investors made up 60 percent of the buyers.
(Additional reporting by Carolyn Cohn and Alastair Sharp; Editing by Ron Askew)