First French Forum on Islamic Finance

How to facilitate Islamic Finance: lessons learnt from experience in the Middle East and the UK

6 December 2007

Islamic Finance in the Middle East: Why is Islamic Finance currently en vogue
Growth in the Middle EastIslamically compliant assets estimated at US$500billionDouble digit growth year on yearLarge pool of liquid funds looking for investments that accord with religious beliefsLiquid funds estimated at US$80billionPressures on margins in traditional marketsIslamic finance is a credible alternative deals done in past 5 yearsSocio-Political dimensionRight deal, right place, right time

What is Shariah ?
Shariah has two principal sources:The Quran the sacred book that records the word of God as revealed to the Prophet Muhammed (PBUH)The Hadith the body of documents that record the Sunnah (the practice of life-example) of the Prophet (PBUH)Four schools of Shariah jurisprudence: Hanafi, Malaki, Shafii and HanbaliJurists undertake process of Iftihad with aim to achieve Ijma

Islamic Finance in the Middle East: The Infrastructure
Islamic Standard Setters:Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI)Islamic Financial Services Board (ISFB)International Islamic Financial Market (IIFM)Development Organisations: IDB; LMCDevelopment of Shariah knowledge:FIQH AcademyShariah Supervisory BoardsIssuance of holistic banking licences:Dedicated units/ fundsDedicated indices/ sources: Dow Jones IndexDevelopment of the human resource

Islamic Finance in the UK : overview

London now seen as an increasingly important global centre for Islamic Finance. The main reasons are:Global expansion of Islamic finance (more than 300 financial institutions offering Islamic products)Markets and skills base: strength of the UK financial services industry with proven track record of developing and delivering new productsEnglish law already the preferred legal jurisdiction for many Islamic finance transactions - High Court legal case of Shamil Bank of Bahrain EC vs. Beximco Pharmaceuticals et al (2004)Islamic windows: new business lines established by major international financial institutionsPublic policy and taxation: Islamic products now on the same tax footing as their conventional counterparts - most recently, the Finance Act 2007 clarified the tax framework in the case of SukukSingle financial regulator (FSA)

Islamic Finance in the UK : the current position
To date, three wholly Islamic banks authorised by the FSA: Islamic Bank of Britain (2004); the European Islamic Investment Bank (2006) and The Bank of London and the Middle East (2007). Other applications in the pipeline. FSA also authorised one Islamic hedge fund manager and considering application from the first wholly Islamic Takaful providerApplication process under Part IV of the Financial Services and Markets Act 2000 (FSMA)Three main areas of potential difficulty in applying FSMA to Islamic firms: Regulatory definition of productsThe role of Shariah scholarsFinancial promotions

Islamic Finance in the UK: the challenges
Some products and services may be approved as being Shariah -compliant by some Shariah scholars but not by others In the UK, the FSA supports trends towards common Shariah standards by organisations such as the IFSB and the AAOIFIShariah compliance throughout the product life cycle: dealing with Shariah defences choice of law, definitions, representations, waiversIssues for Shariah scholars role of the Shariah Supervisory Board (SSB): executive role or simply advisory. Interaction with the FSA which is a secular and not religious regulator

Islamic Finance in the UK: the challenges

Contracts and documentation risk:In contracts for Islamic transactions, the enforceability of terms and conditions depends on the governing lawIn the case of a dispute, a UK court is unlikely to give a verdict based on Shariah law (Beximco)Contracts have to be written very carefully to minimise potential disputes and state the governing lawMost Islamic contracts are governed by English law and a few under New York lawAdvantages of standardisation of documentation

Islamic finance: future prospects
Islamic Project FinanceStructural innovationIncreasing popularity in historically difficult marketsAward-winning dealsCapital MarketsConvertible Sukuk: PCFC, Nakheel, AldarMultiple Sukuk options:MurabahaIstisnaaMusharakaIjara and Ijara mawsufah fi al dhimmahTradeable Sukuk and development of secondary market: global listingsIslamic securitisationShariah compliant asset portfoliosNot just an Islamic concern

Islamic finance: future prospects
Structured FinanceHedging and derivative-type products (profit rate swaps and forex products)Treasury productsTakaful and re-takafulIslamic Corporate FinancePrivate equity Islamic investment fundsGrowthGlobal listings of Islamic capital markets products London positioning itself as a centre of Islamic financeIslamic retail bankingNon Islamic parties to Shariah compliant transactions / ethical financingStandardisation and centralisation

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