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In the wake of the World Economic Islamic Forum, hosted by London, the EBRD’s Local Currency and Capital Markets Development (LC2) team organised a presentation on Islamic finance at its London HQ this week to raise awareness within the Bank of this fast-growing sector, now worth about US$1.5 trillion.
André Küüsvek, Director of LC2, welcomed representatives of the Gulf Bond and Sukuk Association, Clifford Chance LLP, QInvest and the Islamic Development Bank to the Auditorium for a 90-minute session, in which experts gave an overview of Islamic finance, explaining its principles, structures and terminology and talking through some case studies and challenges before a Q&A session.
Islamic banking has the same purpose as conventional banking - to make money for banking institutions by lending out capital. But adherence to Islamic law, ensuring fair play, avoiding speculation and full risk sharing are also at the core of Islamic banking.
Because Islam forbids simply lending out money at usurious rates of interest (riba), rules have been created to prevent it and bond-style instruments - sukuk - devised to facilitate asset-backed trade through risk-sharing, whether murabaha (cost plus, where a profit margin is locked in in advance of a transaction), ijara (sale and leaseback) wakala (effectively, a securitisation) or istisnaa (when the asset being funded is still being constructed).
It should be said that different scholars of Islam take different views as to the suitability of these instruments under Sharia law.
The EBRD, which now also invests in four countries in the southern and eastern Mediterranean as well as in Turkey, has no Islamic finance business. But André Küüsvek said the EBRD would like to continue engaging in information-gathering about developments in this field, to better understand these markets and the alternative financing options available to potential clients.
There has been accelerating global interest in Islamic finance since 2011, as the “Arab spring” has given voice to a popular aspiration across the Islamic world for a participatory financial sector which could bring unbanked segments of the population into the banking system and support growth and job creation.
“A lot of people [in the region] don’t have bank accounts because they don’t want to be in the conventional banking system,” explained one speaker, Hani Ibrahim. As Director, Debt Capital Markets, QInvest, he was discussing the syndication and Islamic capital markets.
“Giving them the Islamic option brings them into the financial system – and takes them out of the no-man’s-land of the cash economy.”
Among the challenges facing the market, speakers told the session, are questions of definition - with differing interpretations from different Islamic scholars as to which market instruments can be considered Sharia-compliant - and a need for greater liquidity.
LC2 is one of the EBRD’s key strategic initiatives. Its objective is to support the EBRD’s countries of operation to build deeper and more resilient local financial markets. LC2 activities include technical support to investments and capital market transactions which could play catalytic roles in the capital market development process, analytical and advisory work, as well as organisation and implementation of capacity building and knowledge sharing activities.
The UK – the first non-Islamic country to host the World Economic Islamic Forum - is also planning to issue its first sovereign sukuk, set initially at US$200 million, in 2014. This will make it the first nation to issue an Islamic bond outside the Islamic world. Under Sharia law, the bond will pay no interest but offer a share of the profit from the underlying asset instead.
British Prime Minister David Cameron told delegates of the WIEF on October 29: "I don't just want London to be a great capital of Islamic finance in the Western world, I want London to stand alongside Dubai as one of the great capitals of Islamic finance anywhere in the world.”.
Euromoney magazine quoted Badlisyah Abdul Ghani, CIMB Islamic CEO, as predicting that UK corporates are also primed to enter the sukuk market once the benchmark is set. He cited Tesco, which in 2008 issued a sukuk worth $221 million in Malaysia – which makes up about 60% of the global sukuk market – and suggested retailer Marks and Spence and food manufacturer and distributor Cargill might also follow suit.