Category Archives: United Kingdom

Bringing Islamic finance back to its roots in a regulated manner

Bringing Islamic finance back to its roots in a regulated manner

 

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Islamic Finance is in vogue. Various financial centres around the world are vying with each other to assume the mantle of pre-eminence in Islamic finance, challenging upstarts with a wider variety of Islamic finance and product “innovation”

In the Gulf, Bahrain has tried to develop such a niche, while Malaysia has been a pioneer in the Far East. But it is London, with five licensed Islamic finance institutions, that has been making the running, and the finance institutions located in that city have been vigorous in lobbying the UK government to treat Islamic finance products on a par with non-Islamic offerings.

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London Sukuk Summit: 2008 London Sukuk Summit Awards Honour Islamic Bankers Past and Present

London Sukuk Summit: 2008 London Sukuk Summit Awards Honour Islamic Bankers Past and Present

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The Second Annual London Sukuk Summit Awards of Excellence last night honoured a host of regulators and bankers who have contributed much to the Islamic banking and finance movement over the last three decades.

The Awards ceremony was held during the Gala Dinner at the Royal Horseguards Hotel in Whitehall following the opening day of the 2008 London Sukuk Summit based on the theme ‘Gearing Up for UK Sukuk Originations’. The Summit is endorsed by the UK Treasury; UK Trade & Investment (UKTI), City of London Corporation; and the London Stock Exchange.

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First Shariah-compliant capital savings plan launched in the UK

First Shariah-compliant capital savings plan launched in the UK

Alburaq, the London arm of Bahrain-based Arab Banking Corporation (ABC) today launched what it says is the UK’s first shariah-compliant capital protected savings plan.

The product, which is being offered in partnership with the Bank of Ireland, allows savers to deposit between £500 and £1 million in a five year account, as an alternative to a guaranteed equity bond.

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Islamic banking sector booms amid global recession

Islamic banking sector booms amid global recession

Islamic finance has bucked the downward trend as HSBC-Amanah has confirmed savings deposits are up by 209 per cent since January, with income from home finance products rising by 60 per cent.

Amjid Ali, head of HSBC-Amanah, said the figures were encouraging as they were boosted by recurring business. However, he did admit the sector had not escaped unscathed from market turmoil.

He said: “The key difference between ourselves and conventional banking is that we work on the basis of shared values. However, our customers are just as nervous about the current volatility and house deals are taking longer to put through as our clients continue to try and negotiate over prices even after we have organised the financing.”

Mr Ali said the business had continued to grow and confirmed the bank was looking at introducing a commercial proposition for its clients.

He said: “We have listened to our customers and are currently preparing a commercial range of products including aspects such as working capital and the financing of commercial property purchases.

“We are not yet ready to go to market but we aim to have this available as soon as possible.”

Referring to Alistair Darling’s announcement on the launch of a sovereign Sukuk, Mr Ali expressed doubts that anything would be launched this year as he said discussions remained very much ongoing.

He said: “There is a meeting between the various representatives of the Islamic finance sector and HM Treasury on 2 June. However, we are still at the discussion stage and these things take a while to develop.”

Iqbal Asaria, a consultant for Afkar Consulting, said the Islamic finance sector had remained largely unaffected by market turmoil although volumes remained static.

He said: “Muslim customers are like any other and are concerned by the current market. However, the sector remains stable as we are not exposed in the same way to sub-prime.

“At the moment we are very much concentrating, as an industry, on the issuance of a sovereign Sukuk. This has taken up a lot of energy as we look to how exactly they will be structured in a compliant way.”

Speaking about London’s title as the capital of Islamic finance, Mr Asaria said he very much doubted that countries such as France would be a serious contender for a while.

He said: “In London you have all the critical mass and expertise. This does not happen overnight. It is wonderful other countries are taking an interest but nearly every deal comes through London and most are reticent to originate any sort of deal elsewhere.”

Study: Islamic Finance in the UK

Study: Islamic Finance in the UK

The Dutch central bank and regulator AFM have published a joint analysis of UK Islamic finance.

The reason for the study is the strong rise of Islamic financial products and services in the UK. Within a few years a broad range of financial products and services has been introduced for the professional and private market.

The UK has adapted legislation to create a level playing field with conventional financial products and services and from a consumer protection perspective.

Anticipating possible developments in the Netherlands, the Dutch central bank and the AFM have carried out a joint study.

Niche market

The offer of Islamic financial products and services has surged worldwide. In the UK the niche market for Islamic financial products and services is considered important for the position of London as a global financial centre.

In other European countries a centre of activities is yet to form and the range of products is largely limited to the professional market and wealthy individuals.

In the Netherlands the market is also in development. The first retail investment products have been launched and various financial institutions have shown interest in the retail market.

The Dutch report aims to improve knowledge of the Islamic finance sector and investigates whether the existing regulatory framework is fit for purpose.

With respect to improved knowledge, the study concludes that suppliers, consultants and consumers have only limited knowledge of Islamic finance at the moment.

The report warns that this poses a potentially heightened risk of miss-selling of financial products and services, which in turn may lead to reputational damage and legal action.

Regulatory framework

Islamic financial products meet the same economic needs as conventional ones, but generally have a different format.

There are many different Islamic types of contract for these products, which are moreover often of a complex legal nature. This brings with it specific risks, which require all parties to have ample understanding of the matters at hand.

With respect to the adequacy of the regulatory framework the study concludes that the most frequently used types of contract – for Islamic mortgages – are outside the regulator’s peripheral vision.

This is caused by the limited scope of the definition of credit in the Dutch law on financial market regulation. The criteria for a duty of care, however, are open to a much wider definition in this legislation.

As a result, the report concludes that they can probably also be applied to Islamic financial products and services. A similar problem arises in respect of other regulatory aspects. Not every Islamic financing contract qualifies as a loan.

Little transparency

The report notes that there is at present little transparency in respect of the compulsory alms (“zakat”) and halal elements of Islamic finance products such as Takaful (Islamic insurance), muamalat (Islamic banking transactions) and Sukuk (Islamic securities).

The regulatory emphasis is on the co-mingling of funds, the checks and balances in the verification of financial products by Sharia (“Shari’ah”) scholars and compliance with Sharia law in general.

There are also marked differences with conventional banks when it comes to the specific risk profile of Islamic banks. The credit, operational, liquidity and financial risk profile differ. In addition, displaced commercial risk is a typical element in Islamic banking.

By contrast, Islamic banks do not carry interest liabilities, which limits the risk in comparison with conventional banks.

As a result, not every institution qualifies as a ‘ bank’ under the terms of the law and, therefore, does not qualify for a banking license.

When an institution does fall under the legal definition of a ‘bank’, however, the report concludes that the existing regulatory framework of Basel II offers sufficient flexibility to address issues in respect of corporate governance and liquidity.

Definitions may need to be reconsidered

To what extent legislation may need to be adapted in future depends in part on the range of products and associated types of contract that may appear on the market, according to the report.

In particular, the report notes that definitions of common terminology such as “interest” may need to be reconsidered.

The study suggests that financial service providers may need to be better educated on Islamic finance products and services in order to achieve the objective of a true level playing field with conventional financial products and services in respect of legal consumer protection.

The analysis is currently only available in Dutch, although an English translation will be made available by the Dutch central bank in due course.