gif Interview


Baroness Nicholson of Winterbourne


Rod


Chamberlain, non-executive Director , London-based Islamic bank QIB UK


Dr Farhad Reyazat, Editor in Chief, Global Islamic Finance Magazine


How likely is it that more European financial centres will follow London’s example and start actively promot- ing Islamic finance through measures such as tax and legislative amend- ments?


Government policy has been increasingly supportive of the development of Islamic fi- nancial services in recent years because it has been seen to contribute to broader gov- ernment objectives such as combating so- cial exclusion and promoting London and the wider UK as a global financial centre. A key aspect of supportive government policy has been the establishment since 2003 of an enabling fiscal and regulatory framework in the UK for Islamic finance. There have been a number of initiatives which are intended to form part of a continuing process. In 2003 double tax on Islamic mortgages was re- moved and tax relief on Islamic mortgages was extended to companies, as well as indi- viduals. Reforms were made to the arrange- ments for issues of bonds so that returns and income payments can be treated ‘as if’ interest, which has made London a more at- tractive location for issuing and trading Su- kuk. The Financial Service Authority has also sought to ensure that regulatory treatment of Islamic finance is consistent with its statu- tory objectives and principles.


There are also opportunities in the West- ern countries of Europe and North America. Countries such as the US, France, Germany and the UK each have indigenous Muslim populations of between one and five mil- lion. Moreover, the customer base in West- ern countries is not necessarily restricted to Moslems: other customers may be attracted by the ethical and environmental basis of Islamic finance. Historic providers of Islamic finance are facing competition from newly established providers and from conversion of conventional institutions.


What can be done to expand the Islamic wealth and asset management sectors?


The screamingly obvious answer is “increase standardisation of products”. The trouble is that it is more of a question than an answer, because it’s hard to see how one can get the relevant people in, say, Malaysia and Saudi Arabia to agree on what is and isn’t sharia’a- compliant.


I’m reminded of an example from main- stream finance. Everyone knows about syn- dicated loans and everybody knows that if you syndicate a loan its pricing will be set at so many basis points above Libor; but it’s only older people who remember how we used to argue for hours about which were to be the three reference banks whose quoted Libor rates would be averaged to produce the cost of funds. It was critical stuff, too, because some banks in syndicates often risked funding at a loss. Nowadays you just look on the screen and there’s the rate.


Part of me therefore says we’ll get there in the end, that at some time in the fu- ture these products will be standardised, we won’t be straining to arbitrage sharia’a scholars against one another or get three quarters of the way through a complex deal only to discover that our scholars say it’s OK and your scholars say it isn’t. I have great sympathy and respect for the scholars as a group, because theirs is a particularly diffi- cult and complex area. Nevertheless, until that standardisation comes, it will be hard to get the liquidity we need to drive both the supply and demand sides.


So the first answer to what can be done to expand these segments is standardisation. What underlies it is the question of liquidity. If you can answer the standardisation and liquidity questions, I reckon you have the two


keys.


Total global Islamic bond issuance reached $20.2bn (according to Thom- son Reuters data, $19 bn) last year, up from $14.1bn in 2008.


It seems the long-term prospects for the sukuk market remained strong given the increasing popularity of Sharia-compliant products, governments’ support for Islamic finance, huge investment and financing re- quirement in the GCC and Asia regions, and issuers’ desire to tap investors from the Mid- dle East and Muslim Asia. Although we have to point out that the recovery is still likely to be bumpy, however, the default – and near- default – of some high-profile sukuk have highlighted the legal uncertainty of how they are treated in bankruptcy, and clerics still dif- fer on how closely they can be structured to mimic conventional bonds.


Taking to account the up and down of the re- covery road, the fact is that optimism in the sukuk market is increasing. “We are hoping for a very good year for the sukuk market. We had a good first six months and hope the momentum will continue,” HSBC Amanah managing director for global markets, Rafe Haneef, told Business Times in an interview. Sukuk issuers are now looking at a broader set of investor base, unlike previously, where they had a narrow base of investors. Another reason could be seen in sukuk pricing.


Unless you are a sharia-compliant company, bank or fund, fundamentally driver of what instrument you choose is what price you can get from investors. And currently sukuk is still more costly and more structured than com- parable conventional instruments. However the performance of sukuk is relatively better than conventional debt as their structure as asset-based instruments is safer. Although sukuk is on a road to success when it is com- pared to global bond market size close to $91 trillion last year it seems that this is not a straight road and it has a long way to com- plete its brand recognition. However it might be a matter of time before certain people are calling sukuk a market phenomenon.


32 Global Islamic Finance February 2011


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