UK eyes Islamic financial industry

The global Islamic financial industry stands to benefit from the UK's development as a more attractive marketplace for sharia-compliant financing and investment instruments following initiatives announced in the UK budget, according to a report published by Standard & Poor's.

Dubai has been the most active trading centre for sukuk notes so far but the proposed changes to the tax law in the UK will make London more attractive for issuing and trading sukuk and provide greater clarity and certainty for investors and issuers.

"We estimate that up to 300,000 retail customers in the UK would be ready customers for sharia-compliant banking services," said Standard & Poor's credit analyst Anouar Hassoune in a report.

"The establishment of these services in the UK would extend the reach of the Islamic financial model- so far still concentrated in a few countries in the Middle East and Muslim Asia," added Mr Hassoune.

"As for wholesale banking, London has the capacity to become a hub for sharia-compliant financial flows that seek recycling in Europe."

As competition heats up among financial centres to attract Islamic issuers and investors, the City of London has a number of competitive advantages compared to its emerging market counterparts. It already has more banks supplying services under Islamic principles than any other Western financial centre and is the only centre actively involved in sharia-compliant market intermediation not located in a Muslim country.

These include its deep, efficient markets, where investors can switch from one asset class to another, and secondary market liquidity.

The overall sukuk market size was estimated to be close to $70 billion at year end 2006 globally, including those issued from Malaysia, Pakistan, and of course the Middle East. This is expected to accelerate, approaching $100 billion according to least conservative forecasts within the next five years.

The largest sukuk to date were those issued by Dubai-based Nakheel Group for $3.52 billion early in the first quarter of 2007. These notes were listed in both Dubai and London.

There are more sukuk listed in Dubai than anywhere else but the secondary market is virtually non-existent.

In London, the secondary market for sukuk is less than $5 billion at the end of March 2007, although this is expected to accelerate. Among listed sukuk, S&P rates an outstanding amount close to $6 billion or roughly 50 per cent of sukuk listed globally.