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Thursday, October 31, 2013

The new world capital of Islamic finance

On the London-Tel Aviv leg of my flight on Tuesday, I was sitting next to a Leftist, professor-looking type (so I conclude from the facts that he spoke unaccented Hebrew, read English and had a very different meal than mine) who was reading an article in the Financial Times about Britain's intent to become the largest Islamic banking center in the world outside the Middle East.
The latest pro-City move will be unveiled on Tuesday at the ninth World Islamic Economic Forum, known as the “Islamic Davos”. The Treasury hopes to launch a bond-like sukuk worth about £200m next year.
The plan – which has been worked on for many years – will be announced by David Cameron and is endorsed by Mr Osborne in the Financial Times as a means of stimulating Islamic investment in London and Britain. 
“While others in the western world resist change, this government is embracing it: banging the drum for British businesses, seeking out new markets, welcoming overseas investment with open arms,” the chancellor writes.
Islam prohibits interest, so sukuk bonds entitle investors to a share in the returns generated by an underlying asset. In the case of the British bond, it is likely to be backed by rental streams on central government property. [I wonder where they got that idea. CiJ].
Mr Osborne hopes that corporate institutions will follow suit and issue sukuk bonds, promoting Islamic investment and generating more cash to fund British infrastructure.
Mr Cameron will also tell the London conference of plans for a new Islamic index at the London Stock Exchange as a means of identifying Islamic-compliant business activities.
However the Treasury is conscious of the possible political ramifications of the plan, notably any suggestion that the issuance of a sukuk bond might require the British government to restrict its dealings with Israeli-owned businesses.
And of course the British government would never ever do that....

But what does it mean when the British government is creating a huge bond issue that's designed for Muslim investors? Soeren Kern believes that the British government is on a path to establish two parallel financial systems - one like every other western economy and one that is Islamic. and this quote from British Prime Minister David Cameron sounds downright ominous.
Cameron said the new Islamic bond index on the London Stock Exchange (LSE) would help stimulate fixed-income investments from Muslim investors -- especially investors from oil-rich Persian Gulf countries -- by helping them identify which listed companies adhere to Islamic principles.
Investors who practice Islamic finance -- which is said to be structured to conform to a strict code of ethics based on the Koran and Sharia law -- refuse to invest in companies that are linked to alcohol, gambling, pornography, tobacco, weapons or pork. Islamic finance also forbids collecting or paying interest and requires that deals be based on tangible assets.
And unlike the Financial Times, Kern believes that Israeli companies that hope to list in London might be hurt by this as well.
The Treasury also said some sukuk bond issues may require the British government to restrict its dealings with Israeli-owned companies in order to attract Muslim money.
Oh, and by the way, Islamic money is already a powerful force in London.
Britain is already the leading Western center for Islamic financial and related professional services. It is a leading provider of Sharia-compliant finance, with reported assets of $19 billion, according to Islamic Finance 2013, a new report published by The City UK, a financial sector lobby group.
Britain is home to 22 Islamic banks, of which six are fully Sharia-compliant. This is substantially more than in any other Western country or offshore center and is more than double the number in the United States.
In addition, 25 law firms are now supplying services in Islamic finance, which is increasingly being used for major infrastructure projects in London.
Islamic investment has financed London's Shard skyscraper -- the tallest building in the European Union -- and the 2012 Olympic Village. Middle Eastern investors own Harrods, London's most famous luxury department store, and the Manchester City football team.
Muslims also invested in projects such as the massive London Gateway port, the redevelopment of Battersea Power Station and Arsenal Football Club's Emirates Stadium.
Qualifications in Islamic finance are being offered by four professional institutes and at least 16 universities and business schools.
London is also a leader in Islamic retail banking services, with institutions offering a range of Islamic banking products, such as mortgages and car loans.
The growing demand for Islamic retail banking services is being propelled by the demographic transformation taking place in Britain. The Muslim population of Britain will top 3.3 million sometime before the end of 2013 to reach around 5.2% of the overall population of 63 million, according to figures extrapolated from a recent study on the growth of the Muslim population in Europe.
This demographic earthquake -- which is being attributed to large-scale immigration, coupled with high Muslim birth rates and growing numbers of British converts -- is transforming the country's business landscape.
The Guardian notes that the British government has already had to step in once to ensure there was no discrimination against Israel.
The government moved on Monday night to offer assurances that the Islamic bond, or Sukuk, and the Islamic index would not encourage investments that discriminate against Israel. Boris Johnson was forced to order Transport for London to rewrite the contract for the Emirates Thames cable car in the summer amid fears that Israeli companies could have been blocked from involvement in the project. The United Arab Emirates does not recognise the state of Israel.
The Emirates Thames cable car is a cable car that crosses the Thames River near Greenwich, and is included  in the Oyster card, the London public transport card.

But if you're a Brit, here's what ought to sound most ominous.
Speaking on a stage that included Jordanian King Abdullah and the Sultan of Brunei, Cameron dismissed criticism of increasing foreign ownership in Britain: "I know some people look at foreign companies investing in our businesses, financing our infrastructure or taking over our football clubs and ask, shouldn't we do something to stop it? Well, let me tell you, the answer is no."
I guess Cameron thinks he won't be around by the time they say 'convert or die.' What could go wrong? 

Read the whole thing.

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At 5:55 AM, Blogger houdini said...

Islamic Finance Has Failed in Britain

An interesting article about how Islamic Banking in Britain is close to collapse. I've picked out some interesting sections if the article that will surprise you.


So, as we now approach the sixth anniversary of IBB’s launch, I’m sad to finally have to admit that Islamic finance in the UK has been a huge flop. IBB may still be limping on as probably the last bastion of the cause, but it’s difficult to imagine it holding out for much longer.


Since its inception IBB has never made a profit. Not once, not ever. Rather, the company has reported combined losses of almost £45 million (GBP), and its shares have lost more than 95% of their value since the highs enjoyed during the early years. But at least it’s fared better than many of its contemporaries in the industry. So what about the rest of the UK’s Islamic finance providers?

Well, the UK’s first Halal insurance firm, Salaam Insurance, spectacularly shut up shop in 2009 after less than 18 months of trading. Lloyds TSB, which made a half-hearted stab at Shariah-compliant products in 2004, doesn’t seem to have promoted its offering for years. alburaq – owned by Arab Banking Corporation – has effectively withdrawn its savings and mortgage products from the mass market and now serves only the wealthiest of customers.

Even HSBC Amanah, probably the most credible and efficient provider of Halal banking in the UK, has dramatically reduced its dedicated Islamic banking staff in Britain, and its marketing volume has been turned way down. Clearly things haven’t gone well for the UK’s fledgling Islamic finance market since the promise of the early noughties.


There are now hundreds of Islamic finance companies around the Muslim world, and the industry has demonstrated consistent annual growth of between 15%-20%. So it was only a matter of time before venture capitalists in the West decided to throw their weight behind this potential cash cow.

Few realise that the people driving the establishment of Islamic Bank of Britain and Salaam Insurance were not Muslims. Rather it was European entrepreneurs, attempting to mimic the financial success of Halal finance companies in the Middle East, who got the ball rolling for these flagship Shariah-compliant corporations. The flowering of Britain’s Islamic banking movement had little to do with the Koran and much more to do with capital gains.



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