The growing importance of Islamic finance

The global popularity of Islamic finance has grown sharply over the past 10 years and here, Geoff Cook looks at how Britain and Jersey are tapping into this flourishing market.

In 2014, Britain’s export credit agency announced that it will guarantee a sukuk bond for the first time next year, in a move that will boost London’s position as a centre for Islamic finance. Britain became the first Western government to sell an Islamic bond four months ago, where it saw an unprecedented level of interest as it attracted bids worth more than 10 times the 200 million pounds on offer.

Islamic finance has been growing exponentially in recent years, where new issues have grown from $5bn (£3.3bn, €4.2bn) in 2003 to $134bn in 2012.

It is exciting to see Britain is expanding its position in Islamic finance, where they’re also creating an Islamic index on the London Stock Exchange.

Jersey is also seeing expanding activity in delivering shariah compliant products. We have seen several Islamic institutions in the UK benefit from the services offered by Jersey, such as Gatehouse Bank, one of the five Islamic banks registered in the UK, which has issued two sukuk bonds through Jersey.

Benefiting from the GFC

Sukuk bonds differ from conventional bonds, where they have been adapted to suit shariah law, which prohibits the charging, or paying of interest. Instead, investment in the bond gives the investor a share in a particular asset owned by the investment company, such as a share in a property, where the bond owner is then able to collect their profit as a rent.

This format makes sukuk bonds stand out from conventional bonds, and offers an alternative funding opportunity to those who live by Islamic law.

The sukuk market offers a strong opportunity to drive infrastructure development, according to the governor of the Central Bank of Malaysia,

She also stated that Asia requires $8.3trn through to the year 2020 to meet infrastructure needs, while the Middle East needs more than $2trn. Sukuk bonds therefore facilitate investment into growing economies, where they may not have otherwise been able to under shariah law.

In addition to facilitating investment in developing countries, the growth in Islamic finance is also motivated by the recent financial crisis, because of their less conventional format that emphasises risk sharing.

Sukuk bonds and other similar financial instruments appear to have avoided many of the most severe consequences of the crisis because they are underpinned by equity, rather than debt, which means that they are more closely connected to the real sector.

In fact, growth in Islamic finance has generally outperformed the growth of conventional financial instruments after the onset of the financial crisis in 2008.

This growth is funding the development of businesses and infrastructure in growing economies, and Jersey is playing its part in supporting this funding by providing knowledge, expertise and experience relating to the establishment of shariah compliant structures, which further enables investors to make an informed investment through Jersey Protected Cell Company structures.

(Interntional Adviser / 08 January 2014)

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Alfalah Consulting - Kuala Lumpur: www.alfalahconsulting.com
Islamic Investment Malaysia: www.islamic-invest-malaysia.com