Although the concept of Islamic or Sharia' compliant finance has been around since about 1000 AD, it was only three decades ago, in a small Egyptian town of Mit Ghamr, where the model truly proved successful in recent history. The key ideas behind Islamic Finance are twofold. Loans are equity based, in the spirit of shared risk and profits between the lender the borrowers - this means that interest (or Riba') is prohibited. Additionally, investments must be socially responsibility meaning that arms, tobacco and alcohol industries are inaccessible options.
In a historic move, the UK has recently announced plans for a GBP 200 million issue of Sukuk (Islamic) bonds - the first such open initiative by a western, non-Islamic country. A USD 1.3 trillion industry, expected to grow to USD 4 trillion by 2020, Islamic Finance has its allure in the wake of the global financial crisis when unconventional alternatives have been sought to promote growth and investment. The intentions behind such a move are beyond merely capturing a piece of the pie, or so Chancellor George Osbourne and Baroness Warsi assure us, but Islamic Finance is more than just alternative financing; it poses unique challenges that must be carefully assessed if the UK is to successfully reap its benefits.
A key issue is the complexity behind making investments "interest free", compliant with Sharia' standards (standards of social responsibility) and competitive in the modern financial industry. These targets can often conflict and indeed, most Islamic products seem to result in an interest based return and risk model despite direct asset investments. Improved legal and regulatory frameworks are essential and while UK has the appropriate resources, this can prove to be a costly process.
In my experience of working in Dubai for one of the region's largest provider of Islamic Investment products, attracting enough of the right clientele is also key. The Middle East’s Sukuk and Islamic products are highly demanded by the Muslim community which holds substantial wealth and places great emphasis on Sharia' compliance as a peace of conscience factor. Their risk profiles are often averse and their return requirements, conservative. Whether or not this will catch on with the Islamic community in the UK is to be seen but it is my understanding that the UK should place greater emphasis on foreign investments from the Middle East. Summer time is often ideal for such visitors who, given the intolerable weather back home, seek the relatively comforting haven that UK has to offer. Again, maintaining high compliance standards in a welcoming environment will attract such individuals. In the long run, Islamic investments in the UK must diversify clientele to non-Muslims as well. Malaysia for one has 80% of Sharia compliant investments held by non-Muslims. Current rates on Islamic financing are competitive with their interest based counterparts but more product knowledge will be needed before investors become comfortable with this relatively new concept in the UK.
The Islamic Finance industry is unique, complex and competitive - UK has much to catch on before it can take on the industry giants Saudi Arabia, Malaysia and Dubai along with newcomers Luxembourg and South Africa. Since Islamic investments are often structured with underlying commodities, UK has the potential to leverage its exceptionally liquid London Metal Exchange and prime location for competitive advantage.
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