LONDON - After taking a battering from the global credit crisis, London has a potential ace up its sleeve as it seeks to restore its reputation as a global financial center — its premier position in the Islamic banking industry.
The British government will decide next week if it will issue a sovereign Islamic bond, or sukuk, a new avenue into a market that's estimated to eventually reach $4 trillion by Standard & Poor's.
"It will further underline London as an international Islamic financial center," said Humphrey Percy, the chief executive of the Bank of London and the Middle East, one of four Islamic banks in the British capital.
"It will be the first hard currency, highly rated, government sukuk to be issued. These are all milestones," Percy said at BLME's headquarters in the capital's financial district, where the bank opened for business just six months ago.
Islamic financing is increasingly seen as a key support to London's reputation as a financial center, which took a beating recently due to the failure of Northern Rock PLC and criticism of proposals to raise taxes on wealthy expatriates living here.
"Islamic finance is a tool that the government realizes it has in its hand, which it can utilize to re-establish some clear blue water between themselves and Wall Street," said David Testa, chief executive officer of Gatehouse Capital PLC. Gatehouse is expecting to receive its license to become the fifth standalone Islamic bank in London within weeks.
As the fallout from the U.S. credit crisis continues to take its toll on banking, interest is rising on banking which conforms to Shariah, or Islamic law. It forbids interest and requires deals to be based on tangible assets, which have provided some insulation from credit turbulence.
Shariah compliant products attempt to replicate the concept of interest through cost-plus transactions, leasing arrangements or by linking payments to returns on underlying assets. The process is normally blessed by a board of religious scholars affiliated with a bank.
While more than two-thirds of Islamic finance business is currently originated in the Middle East, the region is increasingly looking to international capital markets to finance the grander development projects. A $1.5 billion sukuk issue from Dubai Ports World and arranged by London-based Barclays Capital last year allocated 60 percent of its bonds to Western buyers.
A British government sukuk — which could be announced in next week's annual budget — would increase liquidity in the market and expand the secondary commercial market in the takaful, or Islamic insurance, sector.
"Sukuk and other bonds would absolutely explode," David Lewis, the Lord Mayor for the City of London, the capital's financial district, told leading Islamic bankers at a meeting this week. "If we in London could promote such a market, there would be huge international interest."
Unlike conventional bonds, a sukuk gives investors a share in an underlying physical asset, such as leased land, as well as the income that it generates. Takaful, where resources must be pooled, benefits because a sukuk offers a tradable fixed income component that was previously lacking.
The global sukuk market grew by 75 percent to reach $85 billion in the first half of 2007, the most recent figures available. The $24.5 billion raised in the first half alone nearly surpassed 2006 new issuance of $26.8 billion, according to the Islamic Finance Information Service.
The potential of the commercial sukuk market was demonstrated in December by the launch of a $300 million convertible bond for Tamweel, the second largest mortgage lender in the United Arab Emirates. Tamweel said its bond issue, managed by Barclays Capital, was oversubscribed within hours.
Topic: Islamic banks give London world financial clout (Read 1761 times)