Accountancy Magazine
Sharia finance storms the City
Brian Hanney looks at the growing industry with a bright future both within the Islamic world and beyond and examines its basic principles
01 May 2008
Rowan Williams, the Archbishop of Canterbury, caused a furore recently when he said some aspects of Sharia law were ‘unavoidable’ in the UK.
Only time will tell whether that is the case, but what is happening quietly in the bowels of the City of London is the rise of Sharia - or Islamic – finance.
It is not that the moneymen have had a religious conversion. Rather, there is the realisation that there is profit to be made in the Middle East and south-east Asia from massive infrastructure projects fuelled by oil-driven financial liquidity.
It is reckoned the size of global Islamic finance assets is close to $1 trillion (£507bn) and annual growth rates are predicted to be between 15% and 20%.
While the industry is concentrated in the traditional centres of Bahrain, Dubai and Kuala Lumpur, it has taken hold as an activity in London.
Lack of interest needed
So what is Islamic finance? The overarching principle is that all forms of interest are forbidden. The Islamic model works on the principle of risk-sharing. The customer and the bank share the risk of any investment on agreed terms and divide any profits between them.
For example, this could include a specialist investment where customers risk losing their money if it is unsuccessful, although the bank will not charge a handling fee unless it turns a profit.
Products available include current accounts, mortgages, bonds, insurance, personal loans and even a child trust fund.
There is also a strict ban on some kinds of investments, namely in alcohol, gambling, tobacco, pornography and pork-related products.
The last few years have seen an explosion in Islamic finance in the UK. In 2004 the Organisation for Economic Cooperation and Development saw the establishment of the Islamic Bank of Britain, the first wholly Islamic retail bank. This was followed in 2006 by the European Islamic Investment Bank.
Both HSBC and Lloyds TSB have expanded their Islamic finance in the UK.
Even CIMA recently launched a Certificate in Islamic Finance. It offers ‘comprehensive skills’ in areas including Sharia compliance and ‘the complexities of the contracts that underpin this compliance’.
CIMA’s John Willsdon, who runs the course, said: ‘Islamic finance has caught the imagination of a great many people across the world. There is no doubt that the oil wealth amassed in the Middle East and South East Asia has given a tremendous impetus to this relatively new niche in the market.’
Since the launch in December last year, more than 50 students from 13 countries have studied for the certificate.
He added: ‘Rather than fearing the increasing presence of Islamic finance, perhaps the West could learn something from this new kid on the block.’
Perhaps surprisingly, the ICAEW has not yet jumped on the bandwagon to the same extent. However, according to Vernon Soare, executive director professional standards at the institute: ‘The ICAEW is now training in a number of Muslim countries including Bangladesh, Pakistan the Gulf. Sharia finance is an important part of doing business in those markets and is an area that we’re starting to explore.’
One of the aspects of Islamic finance western experts find it hardest to get to grips with is the fact that, to ensure compliance, banks etc. must hire Sharia ‘scholars’ to review and approve each product and practice as ‘halal’ – the Muslim equivalent of kosher in Judaism.
Mohammad Khan, a PricewaterhouseCoopers director involved with Islamic finance, said: ‘Scholars don’t make the design decision. Rather they opine on whether the products are Islamic or not. They are people educated in Islamic jurisprudence and modern finance. They examine the product in detail and may say: this section is Islamic, but this part is not.’
He added: ‘In our experience they are practical.’
This is an abridged version of the magazine article
Only time will tell whether that is the case, but what is happening quietly in the bowels of the City of London is the rise of Sharia - or Islamic – finance.
It is not that the moneymen have had a religious conversion. Rather, there is the realisation that there is profit to be made in the Middle East and south-east Asia from massive infrastructure projects fuelled by oil-driven financial liquidity.
It is reckoned the size of global Islamic finance assets is close to $1 trillion (£507bn) and annual growth rates are predicted to be between 15% and 20%.
While the industry is concentrated in the traditional centres of Bahrain, Dubai and Kuala Lumpur, it has taken hold as an activity in London.
Lack of interest needed
So what is Islamic finance? The overarching principle is that all forms of interest are forbidden. The Islamic model works on the principle of risk-sharing. The customer and the bank share the risk of any investment on agreed terms and divide any profits between them.
For example, this could include a specialist investment where customers risk losing their money if it is unsuccessful, although the bank will not charge a handling fee unless it turns a profit.
Products available include current accounts, mortgages, bonds, insurance, personal loans and even a child trust fund.
There is also a strict ban on some kinds of investments, namely in alcohol, gambling, tobacco, pornography and pork-related products.
The last few years have seen an explosion in Islamic finance in the UK. In 2004 the Organisation for Economic Cooperation and Development saw the establishment of the Islamic Bank of Britain, the first wholly Islamic retail bank. This was followed in 2006 by the European Islamic Investment Bank.
Both HSBC and Lloyds TSB have expanded their Islamic finance in the UK.
Even CIMA recently launched a Certificate in Islamic Finance. It offers ‘comprehensive skills’ in areas including Sharia compliance and ‘the complexities of the contracts that underpin this compliance’.
CIMA’s John Willsdon, who runs the course, said: ‘Islamic finance has caught the imagination of a great many people across the world. There is no doubt that the oil wealth amassed in the Middle East and South East Asia has given a tremendous impetus to this relatively new niche in the market.’
Since the launch in December last year, more than 50 students from 13 countries have studied for the certificate.
He added: ‘Rather than fearing the increasing presence of Islamic finance, perhaps the West could learn something from this new kid on the block.’
Perhaps surprisingly, the ICAEW has not yet jumped on the bandwagon to the same extent. However, according to Vernon Soare, executive director professional standards at the institute: ‘The ICAEW is now training in a number of Muslim countries including Bangladesh, Pakistan the Gulf. Sharia finance is an important part of doing business in those markets and is an area that we’re starting to explore.’
One of the aspects of Islamic finance western experts find it hardest to get to grips with is the fact that, to ensure compliance, banks etc. must hire Sharia ‘scholars’ to review and approve each product and practice as ‘halal’ – the Muslim equivalent of kosher in Judaism.
Mohammad Khan, a PricewaterhouseCoopers director involved with Islamic finance, said: ‘Scholars don’t make the design decision. Rather they opine on whether the products are Islamic or not. They are people educated in Islamic jurisprudence and modern finance. They examine the product in detail and may say: this section is Islamic, but this part is not.’
He added: ‘In our experience they are practical.’
This is an abridged version of the magazine article
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