Muslim insurance could prove popular with other drivers too, says Chiara Cavaglieri

Sunday, 15 February 2009

First it was Islamic current accounts, then mortgages and investment funds, and now we have a motor insurance product that conforms to Islamic law, or sharia.

This move will be welcomed by many of the two million British Muslims looking to buy insurance cover aligned with their faith. But it could also prove popular for non-Muslims who find the notion of an ethical or co-operative insurance product appealing.

Unlike conventional insurance, where risk is transferred from the policyholder to the insurance company, halal [permissable] insurance, or takaful (“guaranteeing each other”), requires all participants to share risk equally. Instead of premiums, participants pay contributions which, as with ordinary insurance, are calculated on the presumed risk of the individual and how likely they are to claim. These contributions are then pooled in a takaful fund which is invested in strictly halal activities. There is also a Shariah Supervisory Committee, made up of sharia scholars, to oversee all activities and to ensure that the whole process is consistent with Islamic principles.

Interestingly, once the fund has been used to pay for any valid claims, any surplus money is redistributed to participants at the end of the year in the form of discounted premiums, which come in addition to any no-claims bonuses.

“What is unique is the ethical nature of what we do,” says Bradley Brandon-Cross, the chief executive of Salaam Halal Insurance. “It’s a transparent process and the opportunity to get something back is attractive to customers, both Muslims and non-Muslims alike.”

But there is no guarantee that there will be any surplus money to share out. Motor insurance firms have been making underwriting losses in recent years: there was a recorded deficit of £267m in 2007 and £204m in 2006.

At Salaam Halal, if claims outweigh contributions, shareholders advance the money to pay for any excess claims. Shareholders then recover that cash in times of profit. This could mean that even in years in which there are surplus funds, there will be little or no money left to share out among participants after the retrieval of shareholders’ contributions.

Sharia prohibits usury – the receiving of interest – as well as the undertaking of haram activities (those that are forbidden to Muslims, such as gambling and dealing in alcohol or arms). This leaves many financial products, including conventional insurance, in opposition to sharia, and so many Muslims have few options when shopping for products that conform to their faith. Standard insurance falls down because it involves the taking of a financial risk that the policyholder will make a loss if a claim does not occur, which to many Muslim scholars constitutes a gamble.

Insurance is just the latest of Islamic financial products to become available in the UK. In comparison with mortgages, the insurance sector has been slow on the uptake. Islamic mortgages have grown from having a 0.3 per cent market share in 2003, to 0.8 per cent in 2009 with a value of £429m, according to the research company Datamonitor.

Salaam Halal’s motor insurance has just become available through price- comparison site Moneysupermarket. com and the indications are that it’s both popular and competitive. “There has been a lot of interest,” says Kaye Pimblett, motor insurance manager at the site. “During its first seven days on Moneysupermarket.com, Salaam Hall returned more than 37,000 quotes. And when they returned a quote, they appeared in the top three positions on over a third of occasions,” she adds. Already, the insurer has plans to take its co-operative model of doing business into the home insurance sector.

Lloyds Banking, which has pioneered Islamic finance products in the UK, is not surprised at the popularity of any sharia-compliant launch. “Although as a market, UK Islamic finance is in its infancy, it’s still set to become big business,” says Emile Abu-Shakra, a spokesman for the bank. “We offer Islamic current and business accounts, mortgages and investment funds.”

Mr Abu-Shakra adds: “We piloted these in just five branches in 2005 but that quickly expanded to all 2,000 the following year.”

Source: http://www.independent.co.uk/money/insurance/islamic-finance-accelerates-into-motor-policies-1622160.html

UK-listed life and pensions company, Friends Provident plc, is keen to explore the Islamic insurance business in Malaysia.

It recently paid RM170 million for a 30 per cent stake in AmBank’s life insurance unit, AmLife Insurance Bhd.

“Takaful is something that we would like to explore with AmBank in the future. We think there would be opportunity there,” Friends Provident’s international operations managing director Rocco Sepe told Business Times recently.

The takaful market’s fast growth means that it is a segment that Friends Provident cannot ignore.

The global takaful market is expected to grow by 15-20 per cent annually, with contributions expected to reach US$7.4 billion (RM26.5 billion) by 2015.
As at 2007, Malaysia has eight takaful operators with total assets of US$2.8 billion (RM10 billion). However, market penetration is only 7.2 per cent.

Takaful is not new to Friends Provident. It has a successful distribution partnership with Riyadh Bank in Saudi Arabia.

“That partnership (with Riyadh Bank) has turned into a good prosperous venture for both sides,” he said.

Sepe said the company intends to “throw its weight behind” AmLife and lend its strength in product development, marketing and customer service to make the venture a successful one.

“Product innovation, in general, is something we want to exploit,” he said.

Friends Provident is the market leader in the UK life and pensions business that includes life protection, income protection, pensions and investment products for individual customers and corporate clients.

The UK company is determined to turn AmLife into the biggest and most successful player in the market.

For the 12 months ended March 31 2008, AmLife or formerly AmAssurance Bhd, had its annualised new life business premiums grow by 18 per cent to RM93 million.

Friends Provident’s entry into Malaysia also expands its footprint in Asia, which is expected to contribute significantly to its overall growth in the future.

“The Asia region holds a lot of interest for us. Malaysia is what I consider to be the next logical step for us, complementing our operations in Hong Kong and Singapore. But it won’t be the final. The whole of Asia is tremendously attractive and exciting in terms of its potential,” Sepe said.

Friends Provident was founded in 1832 in the UK as a life insurance company.

It is now the third largest pension provider in the UK, with more than US$200 billion (RM718 billion) in assets under management worldwide.

Outside the UK, it operates in Hong Kong, Singapore and Dubai and provides life, investment and pension products to around 2.5 million customers.

“In 2007, new business revenue from international business increased by 50 per cent. We expect that percentage to grow. Not because we intend to slow down in the UK but because we are seeing faster growth available outside UK,” Sepe said.

Source: http://www.btimes.com.my/Current_News/BTIMES/articles/rocco/Article/index_html

The insurer is making great strides in Malaysia and the rest of the region, reports Iain Dey in Kuala Lumpur

Amirudin Abdul Halim, deputy chief executive of Etiqa Takaful Bhd, Maybank’s takaful arm, said Takaful Al-Waqi, a single-premium plan, is designed for investors looking for short-term investment with a potential upside return of 8.81% per annum.

He said the potential upside is attractive compared to the 12-month general investment account (GIA) or fixed deposit rates.

From left: Maybank’s head of bancassurance for consumer banking Ibrahim Muhammad, deputy CEO of Etiqa Takaful Bhd Amirudin Abdul Halim and CFO/ED of Etiqa Takaful Hans De Cuyper at the launching of syariah-compliant single premium Islamic investment-linked plan Takaful Al-Waqi in KL yesterday.

Speaking at its launch here, Amirudin said Takaful Al-Waqi is an innovative investment strategy that places at least 90% of the contributions in syariah-compliant fixed-income investments to safeguard the investment .

The remaining 10% is invested in syariah-compliant instruments that are referenced to the performance of an optimised commodity index, he added.

Amirudin said the fund is tailored for the wider segments of the market with an affordable minimum investment of RM20,000.

25-07-2008: http://www.theedgedaily.com/cms/content.jsp?id=com.tms.cms.article.Article_5832636f-cb73c03a-9c8c3f00-9974a1c7

Cultural and religious reasons are commonly cited for the underdevelopment of insurance markets in the Gulf Cooperation Council (GCC) region.

Takaful could be the key to increasing insurance awareness and delivering on customer expectations, capitalizing on the positive economic dynamics of the region.

The opportunities for increased uptake of takaful insurance in the GCC are positive. The considerable economic growth in the region, coupled with a sizable, underinsured population, means that there are substantial prospects for further development of personal lines cover. The ability of the industry to demonstrate the need for and benefits of insurance, as well as to successfully meet customer demands, remains unproven, however.

Over time, if the world average insurance premium of $550 per capita is achieved and applied to the Gulf states, the GCC insurance market has a potential size of $20 billion(currently $4.6 billion). Taking as an example Malaysia, where the takaful market is expected to contribute 20% to the overall market in the medium term, the GCC takaful market has the potential to reach $4 billion at the current level of development (currently $170 million). How much actual premium the takaful sector generates and how quickly it will do so remains to be seen, however, and will depend on the industry’s ability to deliver on policyholder expectations.

In terms of credit ratings for the takaful sector, Standard & Poor’s Ratings Services will apply the same analytical process as for the traditional market, but will also take into account the sector’s positive growth dynamics and high execution risk.

GCC Insurance Markets

The insurance markets in the region are recognized as being underdeveloped, as is shown by the relatively low level of insurance penetration relative to Western or even Eastern Europe.

The economic boom in the GCC, driven by high oil prices, has led to substantial infrastructure investments across the region, with the corresponding need to insure these sizable risks. There are a number of established insurers in each of the GCC markets who are able capable of participating on the new risks arising. Certainly, the development of the non-life insurance market in the region is strong, with premium growth of about 10%-15% on average since 2004. The proportion of personal lines insurance cover, however, and in particular life insurance, remains low.

Opportunities For Takaful

Increasing insurance penetration, raising awareness

Takaful is not a new concept. The idea of cooperative risk sharing is the oldest form of insurance. The Grand Council of Islamic Scholars, Maja-al-Fiqh, only approved takaful as a Sharia-acceptable alternative to traditional insurance in 1985, however. The real opportunity for takaful in the longer term is substantial in our view, as it is able to reach the specific segments of the market that traditional insurance has been unable to attract.

Strong growth relative to traditional insurance market

The GCC takaful market is currently growing at about 40% per year, and gross contributions (equivalent to gross premiums written) amounted to nearly US$170 million in 2005.

This appears impressive relative to the expansion of the world markets, with average premium growth at 2.5% in 2005 (Swiss Re sigma No. 5/2006). It is, however, important to remember that this is a new segment of the market and growth at this level is not unexpected. At the same time, this growth is not purely driven by the personal lines market–one which we consider to be a natural market for takaful–but to a large extent also by general commercial lines. The main challenge for takaful still remains: to increase awareness of the benefits (social as well as individual) of insurance among retail customers. Still, the future success and sustainability of this pace of development will be dependent on a number of factors that, within personal lines, are just as relevant to the traditional as to the takaful regional markets.

The Success Factors

Product innovation and service quality

Although compulsory lines of business (motor and, in some cases, medical for expatriates) have driven much of the growth in the retail sector across the GCC, personal lines products are far from developed. This is as true of the traditional as of the takaful market. We view the recent announcements by international insurers that they will be entering the family takaful segment as positive, whether this is done as a joint venture with local companies, a greenfield operation, or through a branch.

The takaful market faces some unusual challenges. It has to match the service quality of the traditional insurance market and persuade an uninsured market to use the facilities of the takaful market. But across the Gulf region we are now seeing traditional insurers accept risks into new takaful divisions or subsidiaries of the mainstream company. Although the takaful division is operated as a wholly Sharia-compliant unit, it is fully complementary to the noncompliant business. If this model achieves the three key requirements of meeting Sharia council approval, being accepted by the Islamic community and policyholders, and passing regulatory requirements, the probable benefits of economies of scale to the traditional company will prove a real challenge to the nascent takaful sector. Each of the approaches has its own merits, but Standard & Poor’s is unable to comment on their relative Sharia compliance and acceptance in policyholders’ eyes.

The role of foreign insurers is also important, as they bring pockets of expertise in designing, for example, life products suited to local customers. This is gradually improving product choice, but the success of the takaful business model will depend on its ability to offer the same choice, range of products, level of cover, cost effectiveness, and, ultimately, quality of policyholder security, as traditional insurers. The challenge for takaful operators in developing family takaful will be to structure the products in such a way as to meet any religious and cultural obligations and still offer comprehensive cover.

In our opinion, it will also be crucial for takaful operators to demonstrate their ability to offer a comparable, if not better, level and quality of service than the traditional market when dealing with retail policyholders. The use of improved technology in automating processes (ease of buying a policy, speed of claims handling) to directly benefit the consumer will also benefit the takaful operators’ long-term competitive standing and prospects in the market.

Promotion and distribution capabilities

Even with the best products and service, future development will be constrained without the creation of demand and an increased awareness of the need for insurance. The onus still remains on the takaful operators to emphasize the broad appeal of Islamic insurance. In fact, takaful can be marketed as the ‘ethical’ alternative to insurance contracts due to its rigorous screening of investments. Additionally, in our view, expansion of independent financial adviser networks in all the Gulf states is essential. At the same time, some form of regulation is necessary to ensure adequate training of advisers and quality of advice to protect policyholders. The growth of Islamic finance, and in particular retail Islamic banking solutions including Islamic mortgages and credit cards, is certainly encouraging.

We also see bancassurance as providing the right additional distribution mechanism to reach the right retail customer. In the more established Malaysian takaful market, contributions from bancassurance constitute slightly more than 20% of all takaful contributions, second only to direct marketing (about 45%). In comparison, this distribution channel remains underutilized in the GCC, and generally contributes only a small amount to the overall contributions generated, as there are few bank-owned takaful operators.

Policyholder security, enterprise risk management, and profitability

Many family takaful contracts, and some general takaful contracts, will be more long-term in nature than the policies currently prevailing in the market (such as term life assurance or mortgage protection products). Therefore, the ability of a relatively new takaful operator to service claims and ensure policyholder security over the next 10-20 years is crucial. This is where a strong regulatory environment
comes into its own–to protect the policyholder and encourage healthy development of the industry, for both the traditional and the takaful segments. Specifically for takaful, the role of the Sharia board in overseeing the proper management of policyholder funds should help to increase transparency and improve corporate governance. Participants can increasingly benefit from the scrutiny of takaful operators by rating agencies such as Standard & Poor’s.

Generally, capitalization is strong given the underwriting risk base, and is expected to remain so for the medium term for both traditional and takaful insurance providers. Few insurers, however, have developed a more comprehensive, holistic approach to capital and risk management, and many appear to face high investment risk in their portfolios. Although traditional insurers currently have more investment opportunities open to them, they don’t always take them. In fact, a lot of the regional companies have a high percentage of equities in their investment portfolio. In the recent market corrections, companies have faced substantial volatility in earnings and shareholders’ funds, and have experienced reduced investment liquidity. There has been a high level of liquidity for policyholders’ funds, however, as cash deposits typically generously cover technical reserves. For takaful providers, as Islamic financial markets are developing rapidly, we expect that investment concentration risk, subject to management asset allocation choice, will be diversifiable in the medium term. Nevertheless, quantification of the risks undertaken throughout all operations, whether investments or underwriting, still requires development to ensure controlled earnings over time.

To date, takaful has not necessarily been the more profitable approach, as the general concept of mutualization of risks is applied. Average combined ratios have been higher than for traditional, regional peers.

Although the essence of takaful is cooperative risk sharing and community well being, rather than profit optimization, continued underwriting profitability will be important in order to invest in future growth. At the same time, takaful operators are currently suffering from a lack of economies of scale and an inability to more effectively diversify their risks. Hence, the management fees and contributions charged appear high in light of the true costs incurred by the operator. Although it is up to the individual Sharia boards to look more closely at this, we expect fees to decline and premiums charged to be more reflective of the level of cover provided as competition and scale in the takaful segment increase. The key benefit for policyholders over time, however, will be the distributable surplus more closely reflecting actual performance.

Source: http://www.ameinfo.com/116316.html
United Arab Emirates: Tuesday, April 10 – 2007 at 15:19

By Richard Harris | 16:12:15 | 13 June 2008

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.

Keith Leach, head of Alburaq at ABC, said despite growing availability of Islamic home finance products there had previously been a dearth of options for Muslims wishing to save money in accordance with their religious beliefs. The new account was an easy way for Muslims to gain exposure to equity markets in a secure way, he added.

‘There are restrictions on the type of companies that are considered allowable,’ he said. ‘The companies must not be over reliant on debt nor must they be engaged in activities that conflict with the principles of shariah.’

‘Many of these principles will be similar to those required by ethical investors.’

The core principle of Islamic finance is that interest is forbidden, though according to Shariah law investment in companies which profit from the sale of alcohol, pork or pornography, for example, is also forbidden, or ‘haram’. Alburaq has a committee of independent scholars to ensure shariah compliance.

At maturity on 5 September 2012 savers will receive their initial capital plus 100% of any gain in the performance of 20 shares selected from the global Dow Jones Islamic Titans 100 Index.

Source: http://www.citywire.co.uk/personal/-/news/money-property-and-tax/content.aspx?ID=305719

Dubai Holding, a group of companies owned by the ruler of the wealthy Arab emirate, said on Tuesday it will consolidate two units to create a sharia compliant investment firm, tapping into the fast-growing market.

The company plans to combine Dubai Islamic Investment Group and Dubai Bank in a new entity called Dubai Banking Group, which would invest across the Middle East, Africa and South East Asia.

” [It] will… aggressively target significant direct investments and acquisitions in a wide range of sectors across the world’s biggest Islamic markets,” Soud Ba’alawy, chairman of Dubai Group, the financial services arm of Dubai Holding which will manage Dubai Banking Group, said in a statement.
Story continues below ↓
advertisement

A nearly six-fold rise in oil prices since 2002 has flooded the Gulf with cash that bankers are scrabbling to invest. At the same time, demand from the world’s 1.3 billion Muslims for investments that comply with their beliefs has soared.

Islam bans interest, and demands that risk and reward be shared between all participants in a business venture. It also prohibits investments in some business sectors, such as alcohol and pornography.

In January, Dubai’s Noor Islamic Bank started operations. The lender is 25% owned by the government of Dubai and 25% by Dubai ruler Mohammed bin Rashid Al-Maktoum, also vice president and prime minister of the UAE.

Dubai Banking Group will be competing with firms including Bahrain-based Islamic investment banks Gulf Finance House and Arcapita.

Gulf Finance House said earlier this week it would build a cement company worth up to $2 billion to take advantage of a construction boom while Arcapita said Tuesday it bought Pinnacle Real Eastate, a European warehouse firm, for an undisclosed sum.

Dubai Banking Group already has investments in Islamic financial institutions in the UAE, Kuwait and Malaysia which combined are worth more than $10 billion.

Dubai is trying to diversify its sources of income away from the energy sector, and has promoted itself as a global financial services hub.

Source: http://www.arabianbusiness.com/518573-dubai-holding-creates-new-islamic-investment-firm?ln=en

Britain’s first independent Islamic insurance company has received regulatory approval from the Financial Services Authority (FSA), it was announced on Thursday.

Principle Insurance, formerly known as British Islamic Insurance Holdings, will offer Shariah compliant home and car insurance from later this year.

Abdulaziz Hamad Aljomaih, chairman of Principle, said in a statement: “I believe Principle will go some way in altering the perception of Islamic finance in the UK by showing that progressive, sensible and profitable businesses can be established in accordance with Islamic law.

“Achieving FSA authorisation is a clear vindication of my belief that Shariah compliant financial products are not only equitable and profitable but also conform to the modern day principles of international finance, especially from a regulatory standpoint.”

All of Principle Insurance’s products and services will be approved by the company’s Shariah supervisory committee. This comprises Shaikh Nizam Yaquby of Bahrain; Dr Mohammad Elgari of Saudi Arabia; and Mufti Abdul Kader Barkatulla, who is based in Britain.

Principle will have around US$120 million in capital from institutional and private investors in the Gulf and Asia. Saudi Arabian investors account for 45.7% of the capital.

It aims to focus first on the UK, before looking at entering other European countries and the GCC.

Source: http://www.arabianbusiness.com/518184-first-british-takaful-firm-approved

Despite growth rates at least twice as high as those recorded on global conventional financial markets, the Islamic financial industry remains fraught with diversity and heterogeneity, says Moody’s Investors Service in its special report entitled Islamic Banks and Sukuk: Growing Fast, but Still Fragmented.

Modern Islamic finance is a recent phenomenon. Only 30 years have passed since the first fully fledged Islamic financial institutions (IFIs) emerged, and the market for Sukuk (Islamic bonds) was virtually non-existent as recently as the beginning of this century.

Today, estimations tend to value the Islamic financial industry – which comprises about 300 Sharia-compliant banks, takaful (or Islamic mutual insurance) companies and mutual funds in line with the principles of Islamic finance – at more than $700 billion in terms of assets.

“The market for Sukuk alone, accounting for around $100 billion at year-end 2007, has exceeded the GDP of a country the size of Morocco,” says Anouar Hassoune, a Moody’s analyst and author of the report.

Moody’s notes that current excess liquidity prevailing in Gulf econ-omies since 11 September 2001 has fuelled both sustained demand for the products supplied by IFIs and the booming expansion of the market for Sukuk, while contributing to creating a very close link between Islamic banks and what remains to date a relatively illiquid compartment of the bond market. Nevertheless, the rating agency expects liquidity in the Sukuk market to improve gradually as the variety of Sukuk issuances widens.

Not only are volumes expected to exceed $150 billion by the end of the current decade, but the nature, geographic location and credit quality of future issuers are also expected to considerably evolve and diversify.

At this stage, the Islamic financial industry remains very much intermediated – or, in other words, more widely dominated by financial intermediaries capturing deposits to recycle them into on-balance-sheet asset portfolios than by disincarnated, de-territorialised and virtual capital markets.

Weakly co-ordinated

Moody’s notes that some 90 per cent of Sharia-compliant assets are concentrated on IFIs’ balance sheets and on those of conventional banks offering Islamic financial services and products through “Islamic windows”. Islamic finance is becoming increasingly “internationalised,” but essentially remains a collection of disseminated and still weakly co-ordinated local operations.

“A number of forces within the Islamic financial universe tend to contribute to its fragmentation. The core principles underlying Islamic financial products, although subject to vast consensus as to their formal content, remain differently interpreted and differently weighted in practice,” says Hassoune.

In Moody’s opinion, the lack of technical and contractual standardisation impedes the capacity of Islamic finance, as an alternative financing and investment model, to enhance its globalisation process, without necessarily forbidding its internationalisation.

Initiatives aiming at either introducing Islamic finance or strengthening its position are mushrooming across a wider range of countries, whether home to majority Muslim populations or not, but these remain country specific and weakly co-ordinated, despite the sustained endeavour of several cross-border organisations to bring some consistency to the concept.

“Building in prospective views is not an easy task in such a young industry. Nevertheless, we expect the Sukuk market to become more complex, more structured, larger, more diversified and more liquid as it evolves over time,” adds Hassoune.

Equally, IFIs are expected to explore new geographic horizons as well as new business lines, become more competitive and (paradoxically) contribute to the gradual emergence of a more disintermediated Islamic financial industry – one with a reduced presence of Islamic banks.

Source: http://www.gulfnews.com/business/Banking_and_Finance/10208467.html

The UK is set to become the first non-Muslim country to be a major financial centre of Islamic finance. This article looks at the conditions that have allowed Islamic finance to grow in the UK, and how it may move forward.

Competition is heating up among the world’s financial centres to attract Islamic issuers and investors. So far, Dubai, Kuala Lumpur, Bahrain and, to a lesser extent, Riyadh and Singapore, are all well placed to capture part of the booming Islamic finance industry. The latest entrant is London, the only financial centre actively involved in Sharia-compliant market intermediation that is not in a Muslim country. London, as a financial centre, has a number of competitive advantages compared with its emerging-market counterparts, including:

* Large size and international reach.
* Deep, efficient markets, where investors can switch from one asset class to another (including in and out of sukuk).
* Liquidity in the secondary market.
* Tremendous human resources and expertise (including research, analysis, operations, and structuring capabilities).

In addition, the legal environment is robust. The tax regime applicable to sukuk coupons will make them deductible – no longer viewing them as rental payments but equivalent to interest. Announced 21 March 2007, among other initiatives pertaining to Islamic finance, this sukuk-friendly amendment to tax law in the UK stands to make London more attractive for issuing and trading sukuk, although Dubai has been so far the most active trading centre for sukuk notes. The largest sukuk to date were those issued by Dubai-based Nakheel Group for US$3.52bn early in the first quarter of 2007. These notes were listed in both Dubai and London.

The overall size of the sukuk market worldwide is estimated at nearly US$70bn,including issuance from Malaysia, Pakistan and, of course, the Middle East. However, the bulk of sukuk are over-the-counter instruments. Listed sukuk account for only 20-25% of outstanding sukuk issued worldwide, that is, US$10-15bn so far. There are more sukuk listed in Dubai than anywhere else, but the secondary market is virtually non-existent. Second is London, where the secondary market for sukuk totalled less than US$5bn at 21 March 2007. Among listed sukuk, Standard & Poor’s Ratings Services rates close to US$6bn or roughly 50% of sukuk outstanding that is listed globally. New sukuk issuance is expected to accelerate, and could reach US$20-25bn in the next five years, according to the most reasonable forecasts.

We believe that the global Islamic financial industry will benefit from the UK’s development as an attractive marketplace for Sharia-compliant financing and investment instruments – on both the wholesale and retail side. We estimate that up to 300,000 retail customers in the UK would be ready customers for Sharia-compliant banking services. 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 parts of Asia. As for wholesale banking, London has the capacity to become a hub for Sharia-compliant financial flows that seek recycling in Europe. For example, Islamic investment banks such as the Bahrain-based Arcapita Bank B.S.C. and Gulf Finance House, both have offices in London where vast amounts of liquidity from the Gulf meet attractive Sharia-compliant asset classes packaged in private equity, real estate, and infrastructure funds domiciled in the more mature and stable European economies.

The UK intends to become a key player in market intermediation for sukuk. Competition from western financial centres is low, as limited appetite for Islamic finance is coming from New York, more interested in facilitating the trading of Sharia-compliant stocks, especially through the Dow Jones Islamic Index and, more recently, through the newly created family of Standard & Poor’s Sharia indices. London, on the contrary, has a wider approach to Islamic finance, encompassing a broader range of financial instruments and asset classes. For example, the Financial Services Authority (FSA) has recently licensed the European Islamic Investment Bank, a wholesale financial institution created expressly to recycle the massive amounts of institutional and private liquidity in the Gulf into Sharia-compliant asset classes originated in mature, stable, and transparent western markets.

The FSA has taken on an Islamic retail strategy in keeping with its mission that aims for inclusion. This principle aims at combating financial exclusion, that is, the incapacity or unwillingness of households to access banking services because of distance, poverty or religion.

Some UK citizens do not actively deal with banks simply because banking in the UK is based on interest, called ‘riba’ in Arabic, considered unlawful according to Sharia, or Islamic law. To prevent Muslim customers being excluded from the banking market because of their beliefs, the FSA has given its green light to established conventional banks to offer Sharia-compliant services. Both HSBC, through its Amanah brand, and Lloyds TSB already offer Islamic banking services.

The FSA has also recently licensed a fully-fledged Islamic financial institution, the Islamic Bank of Britain, to serve the UK retail market with Sharia-compliant products. For Sharia-compliant services to become more comprehensive in the UK, the country needs to offer takaful (or Islamic mutual insurance). Licensing a takaful company or allowing conventional insurers to offer takaful products could be the next step in the UK’s strategy to further enhance its position as a leading Islamic financial centre.

The UK itself might be interested in issuing sukuk notes. Such issuance would be of high interest for investors who adhere to or favour Islamic finance. If the country did so, its issuance would be the second to carry an AAA rating, after sukuk issued by the Islamic Development Bank in 2005 for US$1bn. In addition, the UK would be the third sovereign outside the Middle East to issue Sharia-compliant paper, after Malaysia in 2002 through a US$600m structure called Malaysia Global Sukuk Inc. Japan has also expressed its intention to tap liquidity in the Gulf through the issuance of Sharia-compliant notes. The German State of Saxony-Anhalt has also issued sukuk, through a vehicle called Stichting Sachsen-Anhalt Trust for €100m in 2004.

http://www.gtnews.com/article/6846.cfm