Islamic finance and banking will win

Director of Finance online: BDO Stoy Hayward says financial turmoil puts Islamic products in strong position.
With the financial markets in the most volatile state since the 1930s, and the London Stock Exchange experiencing more highs and lows than a rollercoaster ride, increasing numbers of individuals and corporations will now invest in Islamic banking and Sharia compliant products than ever before, predicts accountants and financial advisers BDO Stoy Hayward.

Highly disciplined

According to the financial advisers Islamic banks are one of the few financial institutions who still have significant sums of money available to finance individuals and corporates, unlike their western banking counterparts, who will only continue to constrict their lending policies in light of the current economic crisis.

Dan Taylor, Head of Banking at BDO Stoy Hayward, says: “As the risk profile of Islamic Banks is generally lower than conventional western banks, this presents a more solid option for both retail and institutional investors and suggests that dealings with Islamic financial institutions will grow dramatically as people switch to more secure products in this environment.”

“Further growth of Islamic banking in the UK will also be attributed to their more conservative approach to financing, as the risks are shared with the investor, much like the private equity model. In addition, it is more difficult for Islamic financial institutions to use leverage; therefore their risk profile is naturally lower,” continues Taylor.

Currently 20 major global banks operating in the UK have set up units to provide Islamic Financial Services. They have been joined by five stand-alone Islamic banks.

In comparison, Switzerland has five Islamic financial institutions and France and Luxembourg each have four.

“In light of the market turmoil, we could expect the number of stand alone Islamic financial institutions present in the UK to double over the next three years, further reaffirming London’s position as the pre-eminent centre of choice for the provision of Islamic Finance,” concludes Taylor.

CEO of DIFC Authority calls for greater innovation in Islamic Finance

Nasser Al Shaali, the CEO of the DIFC Authority called on financial centres across the world to coordinate their efforts to promote innovation in Islamic Finance products.

Addressing an audience of financial professionals from around the world on the first day of the London Sukuk Summit 2008, Al Shaali said financial centres should work together to address weaknesses in legal and institutional frameworks that are hampering product innovation in Islamic finance.

'There are still many countries where the legal and institutional framework is not explicit and transparent about Islamic finance, and the framework developed for conventional finance is being applied to Islamic institutions,'

Al Shaali said.

'It is unclear whether such an approach is sufficiently flexible to address and supervise the unique mix of risks and special operational features of Islamic finance.

Significant weaknesses in the legal, governance and systemic liquidity infrastructure are impeding the spread of product innovations in Islamic finance and preventing effective supervision and risk management. There needs to be more done in terms of setting supervisory and regulatory standards tailored to Islamic banks. This is necessary to support industry development,'


He added.

Al Shaali also called for greater standardisation in Islamic finance, which would help reduce costs and speed the issuance of Sharia-compliant products. 'One way to promote this is through standardisation of, or agreement on, a set of fatwas issued by Sharia scholars. Some jurisdictions are helping industry practitioners by collating fatwas issued in their markets to serve as a useful aid to those structuring Islamic financial transactions,' he said.

Al Shaali explained to the audience how DIFC is helping the Islamic Finance industry in dealing with key challenges. 'DIFC provides a clearly defined legal and regulatory framework that facilitates innovation in the field of Islamic Finance.' One of the examples of DIFC's innovative initiatives aimed at the growth of the Islamic Financial industry, he said, is the creation of Waqf Trust Services - the first exclusive Islamic trust services provider in the world offering Sharia-compliant global trust services.

The Dubai International Financial Exchange (DIFX), Al Shaali said, 'provides a conducive framework for the listing and trading of Islamic securities. The Dubai International Financial Exchange is the largest and most liquid exchange for sukuks, or Islamic bonds, in the world, with a total value of nearly $17bn.'

Other initiatives launched by DIFC to catalyse the growth of the Islamic Finance sector include industry benchmarks such as the Sukuk Index developed in collaboration with HSBC.

Al Shaali went on to talk about the DIFC's leading role in moving towards convergence and regulatory standardisation in the field. 'We are working with regional and international regulatory bodies and are entering into co-operation and information-sharing arrangements with other regulators and counterparties. We have signed over 27 bilateral MoUs with various regulatory authorities around the world, including the Mutual Recognition model with Malaysia.'

The London Sukuk Summit, which is being held under the theme, 'Gearing up for UK Sukuk Originations', is supported by the UK Treasury, the Financial Services Authority (FSA), the City of London Corporation and the Islamic Financial Services Board (IFSB). It is also endorsed by UK Trade & Investment (UKTI), the trade promotion arm of the UK Department of Trade & Industry.