financial markets series islamic financeof the uk as a global gateway for islamic finance. the key...
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FINANCIAL MARKETS SERIES
ISLAMIC FINANCEMARCH 2012
sponsored by:
The UK Islamic Finance Secretariat (UKIFS) brings together government andindustry leaders to work in a joint and co-operative manner in the promotionof the UK as a global gateway for Islamic finance. The key aims and objectivesof UKIFS are to co-ordinate and promote the development of Islamic financein the UK and to act as the primary contact point for UK Government bodiesincluding UK Trade & Investment, HM Treasury and the regulator.
In achieving these objectives, UKIFS currently operates six practitioner-ledmarket advisory workstreams that convene regularly to drive the developmentand delivery of strategic goals:
1. Islamic Financial Institutions 2. Retail Banking & Wealth Management 3. Commercial Real Estate 4. Legal 5. Accountancy, Tax & Regulation6. Education, Training & Qualifications (ETQ)
With over 2000 registered individuals and organisations, UKIFS is today theleading cross-sectoral body assisting the promotion and development ofIslamic finance in the UK.
For more information on UKIFS, please contact:Keith Phillips, Commercial Director, TheCityUKE: [email protected]: +44 (0)20 7776 8970M:+44 (0)7767 008327
Gatehouse Bank is pleased to support UKIFS Islamic Finance 2012report. Gatehouse Bank is an active market participant in a growingcommunity of financial institutions in the UK dedicated to the delivery ofShariah compliant solutions.
To maintain London and the UK’s position as the leading western centrefor the provision of Islamic financial services to the international market,industry stakeholders recognise the need for continual education, trainingand qualifications to enhance skills and learning for Islamic financeprofessionals, as well as broader education for other entrants seeking toincrease their understanding on Islamic financial services. We thereforewelcome the latest, credible research and data that supports theseobjectives, and raises awareness about the achievements made by the UKIslamic financial services industry.
With the creation of a more informed audience, and increased businessactivity as market participation grows, Islamic financial services will play anincreasingly valuable role within the international financial system.
Gatehouse Bank is a Shariah compliant wholesale investment bank inLondon offering world class products and expertise.
Our business focus includes:• Real Estate• Asset Finance• Capital Markets• Treasury• Shariah Advisory
www.gatehousebank.com
ISLAMIC FINANCEMARCH 2012
Islamic finance is growing as a source of finance forIslamic and other investors around the world. Thisreport summarises global trends in Islamic finance withparticular reference to how the market is developing inthe UK.
OVERVIEWGlobal market The global market for Islamic financial services, asmeasured by Sharia compliant assets, is estimated by the UK IslamicFinance Secretariat (UKIFS) to have reached $1,130bn at end-2010, 21%up on $933bn in 2009 (Chart 1). Assets are likely to have grown a further14% in 2011 to reach $1,289bn, making a rise of about 150% from$509bn in five years since 2006. Islamic assets represent about 1% of theglobal financial market. The largest centres remain concentrated inMalaysia and the Middle East, including Iran, Saudi Arabia, UAE, Kuwait,Bahrain and Qatar (Chart 2).
Islamic finance has shown resilience during the past two years at a timewhen global recovery has slowed and conventional banking in Westerncountries has remained under pressure. It is not unaffected by broaderglobal macroeconomic problems with some Islamic banks exposed to thevolatile real estate markets. In the Middle East, especially the Gulf, Islamicfinance has benefitted from economic and financial stability in mostcountries, despite political unrest in a few.
The development of Islamic finance is being driven by Sharia compliantinstitutions taking the opportunity to expand products and services thatcan be accessed by Muslim customers and investors. This is leading to theexpansion of retail and capital markets, helping, for example, to meetgrowing demand for infrastructure finance.
Banks account for the bulk of Islamic assets globally with funds andtakaful making up the balance. Banks and funds are major investors insukuk, which strengthened in 2011. Sukuk issuance was up 60% to arecord $84bn: two thirds by Malaysian institutions.
The market for Islamic funds worldwide rose by 8% to $58bn in 2010,estimated by Ernst & Young to have doubled in size from $29bn in 2004.Income has come under pressure with the average management feefalling from 1.5% in 2006 to 1.0% in 2010. Returns of -3% on Islamicfunds in 2011 are likely to have curtailed further growth in Islamic assets,although the potential market for Islamic funds is estimated at over$500bn. Takaful also reached a new high in 2011 with premiumsestimated by Ernst & Young to have reached $16bn.
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sponsored by:
*UKIFS estimateSource: The Banker, Ernst & Young
$bn, assets end-year
509
861
Chart 1Global assets of Islamic finance
933
1130
0
250
500
750
1000
1250
2011*20102009200820072006
677
1289
Source: The Banker
Banking, takaful & fund assets, $bn, end-2010
Iran
Others
Turkey
Banking, takaful & fund assets end-2010 $1,086bn
Bahrain
UK
Qatar
UAE
Kuwait
Malaysia S.Arabia
151
388
94
133
80
1928
52
58
83
Chart 2Islamic Finance by country
Considerable potential exists for expansion of Islamic finance with The Banker estimating that only 12% of Muslims worldwide use Islamicfinancial products. Extent of the industry’s penetration varies substantially.In Bangladesh, for example, Islamic banking accounts for 65% of totalbanking assets but only 4% to 5% in Turkey, Egypt and Indonesia.
Indonesia has the largest Muslim population in the world at an estimated205m and Bangladesh the fourth largest at 149m; India and Pakistanmake up the other two countries with the largest Muslim population eachwith around 177m. These four countries account for 44% of theworldwide Muslim population of 1.6bn (Table 2).
More countries are looking to expand the Sharia offering. New Shariacompliant institutions have been reported by The Banker in, for example,Australia, Azerbaijan, Nigeria, Oman, Pakistan, Qatar and Russia. Oman isthe last of the Gulf Co-operation Council (GCC) states to open the doorto Islamic banks. Leading countries for Islamic finance should providefertile ground for future growth, although the long-term impact ofpolitical unrest on development of Islamic finance in some Middle Easterncountries, such as Egypt, remains to be seen.
Islamic finance in the UK The UK, in ninth place worldwide, is theleading Western country and Europe’s premier centre with $19bn ofreported assets, largely based on HSBC Amanah. London’s profile as theleading Western centre for Islamic finance has grown in recent years,although institutions in the UK have been providing Islamic financialservices for 30 years. An important feature of the development of Londonand the UK as the key Western centre for Islamic finance has beensupportive government policies intended to broaden the market forIslamic products. Islamic finance also has a role to play in facilitating thesupply of finance to ethnic minorities, with the opportunity to build abroader presence in the Muslim community of over 2m people.
Key features of the UK Islamic finance industry:
● 22 banks, of which five are fully Sharia compliant, more than in anyother Western country.
● 37 sukuk issues raising $20bn currently listed on the London StockExchange, including 10 in 2011. Seven exchange trade funds and twoexchange trade products are also quoted on the London StockExchange.
● Around 25 law firms supplying services in Islamic finance.
● Use of Islamic finance for major infrastructure projects in London suchas the Shard of Glass and redevelopment of Chelsea Barracks.
● Advisory services provided by the largest four professional service firms.
● Qualifications in Islamic finance offered by four professional institutesand at least 10 universities and business schools.
● Off-exchange trading in commodity-based agreements linked to LMEcontracts.
Many firms operating in Islamic finance in the UK are members of UKIslamic Finance Secretariat (UKIFS), which is part of TheCityUK.
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ISLAMIC FINANCE MARCH 2012
*UKIFS estimateSource: The Banker, Ernst & Young
BanksFundsTakafulOtherTotal
Sharia compliant assets, $bn
200986354133
933
20088005181
861
20101048
58213
1130
Table 1 Global Islamic finance assets by sector
2011*1200
60254
1289
IndonesiaPakistanIndiaBangladeshEgyptNigeriaIranTurkeyAlgeriaMoroccoIraqSudanAfghanistanEthiopiaUzbekistanSaudi ArabiaYemenChinaSyriaMalaysiaRussiaNigerTanzaniaSenegalMaliTunisiaOther countriesWorld total
2010 estimate % share ofcountry's
population889615909548
1009998
1009971
10034979799
293611298309692
100---
23*
Millions20517817714980767575353231312929272524232117161613121210
2001619
Table 2 Muslim population by country
*% share of world populationSource: Pew Research Center
MARCH 2012ISLAMIC FINANCE
GLOBAL MARKET FOR ISLAMIC FINANCEAs mentioned in the overview, UKIFS estimates that the global market forIslamic financial services, as measured by Sharia compliant assets, reached$1,130bn at end-2010, 21% up from $933bn in 2009. It is likely to havegrown a further 14% in 2011 to reach $1,289bn, making a rise of about150% from $509bn in five years since 2006 (Chart 1).
Assets that can be allocated to individual countries from The Banker’s survey of 500 organisations reveal that the leading countries for Sharia compliant assets are Iran with $388bn, Saudi Arabia $151bn andMalaysia $133bn (Chart 2, Table 3). These are followed by other Gulfstates including UAE, Kuwait, Bahrain and Qatar, and then Turkey. TheUK, in ninth place, is the leading Western country with $19bn of reportedassets, largely based on HSBC Amanah. Countries with most of the 345firms reporting to The Banker’s survey include Kuwait and Malaysia, eachwith 39 firms, and Bahrain with 33 firms. A group of countries includingIndonesia, Iran, Saudi Arabia, Pakistan, UAE and the UK each havebetween 20 and 27 firms supplying Islamic finance (Table 3).
Broadening geographical customer base for Islamicservices The market is currently most developed in Malaysia, Iran andthe majority of countries that form the GCC. These countries remainfertile ground for future growth, although prospects for the Islamicfinance in some Middle Eastern countries could be negatively affected byany further spread of political unrest in the region. Islamic finance ismoving beyond its historic boundaries into new territories. Markets whereIslamic finance is developing include:
● Other countries in the Middle East and Africa such as Turkey, Sudan,Egypt, Jordan, Syria and Nigeria.
● Other Asian countries such as Indonesia, which has the largest indigenous Muslim population in the world, as well as Hong Kong,Singapore, Bangladesh, Pakistan, China and India.
● Western countries such as Luxembourg, Switzerland and Australia aredeveloping as centres for Islamic finance. The US, France, Germany andthe UK each have indigenous Muslim populations of up to 5m,although Russia has much the largest in Europe with 16m.
While scope for development exists in Western countries an appropriatelegal and regulatory structure first needs to be designed andimplemented. The customer base in Western countries is not necessarilyrestricted to Muslims: other customers may be attracted by the ethicalbasis of Islamic finance.
London is seeking to consolidate its position as the gateway to Islamicfinance in Western Europe. Providers of Islamic finance in London arelikely to focus on services that complement those available elsewhere.Government strategy for the development of Islamic finance in the UK issummarised on page 9.
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UK is leadingwesterncountry
with $19bn inreported assets
IranS.ArabiaMalaysiaUAEKuwaitBahrainQatarTurkeyUKSudan BangladeshIndonesiaSyriaEgyptSwitzerlandJordanPakistanBruneiOther countriesTotal
Banks383.5147.8120.492.568.956.250.028.019.012.111.410.08.77.96.65.75.63.89.8
1047.7
Banking, takaful, fund & other assets, $bn, 2010
Total388.0151.0133.494.179.757.952.328.019.012.111.710.58.77.96.65.95.73.8
10.31086.5
Others---
0.03.20.10.0---
0.1---------------------------
0.1---
0.03.5
Takaful4.23.29.91.50.10.40.5---------
0.30.5---------
0.1------
0.420.9
Numberof firms*
2726392139331946
131626322
10231
35345
Funds0.3------
0.010.61.31.8---------
0.1------------
0.1------
0.114.3
Table 3Islamic finance by country
*includes only those firms submitting data to the Banker’s surveySource: The Banker
--------------of which-------------
Sharia compliant financial servicesBanking and sukuk represent the forms of Islamic finance that are mostwell established, with takaful (insurance) and funds also developing.Products that may be the subject of innovation include private equity andprivate wealth management.
Banking In The Banker’s survey, balance sheet assets of Shariacompliant banks rose by 22% from $863bn in 2009 to $1,048bn in2010. Commercial banks account for the majority of assets, withinvestment banks making up most of the remainder. Ernst & Young hasindicated that profitability of banks in the Middle East and North Africastabilised in 2009 and 2010 having suffered in previous years due tohigher provisions and operating costs.
Considerable potential for expansion exists with The Banker estimatingthat only 12% of Muslims use Islamic products, although scope is morelimited in countries where Muslims represent a minority. Extent of theindustry’s penetration varies substantially. In Bangladesh, Islamic bankingaccounts for 65% of total banking assets; in Bahrain 46% and SaudiArabia 35%. However penetration in other countries is limited withIslamic banking accounting for only 4% to 5% of total banking assets inTurkey, Egypt and Indonesia (Chart 3).
Islamic banks, including those with Islamic ‘windows’, are now looking toenhance their position in faster growing core regions of Middle East, Asiaand Africa. Offering products that are competitive on price and servicecould help to generate business not only from Muslims with a preferencefor Sharia compliant services, but also from Muslims and other customersthat currently use conventional banking services.
Significant international developments in the past year have included:
● Launch in November 2011 by Thomson Reuters of the world’s firstIslamic interbank rate, which is designed to provide an indicator for theaverage expected return on Sharia compliant short term interbankfunding.
● Oman’s decision in May 2011 to permit the establishment of Islamicbanks in the country the last of the six GCC states to do so. The aim isto tap into regional demand for Sharia compliant banking services andother products currently being met elsewhere in the region andtherefore to curtail the current outflow of investment from Oman.
● Qatar’s move in February 2011 of preventing conventional banks fromoffering Sharia compliant products through Islamicwindows. The boundary is expected to provideopportunities for Islamic banks to gain market share.
In the UK, the five fully Sharia compliant banks wereestablished between 2004 and 2008 and put the UK in thelead in Western Europe (Table 4). There are also an estimated17 conventional banks that have set up windows in the UK toprovide Islamic financial services. HSBC Amanah is the onlyconventional bank with an Islamic window to report to TheBanker’s survey: its assets of $16.7bn account for 88% of the
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ISLAMIC FINANCE MARCH 2012
Source: The Banker
HSBC Amanah FinanceBank of London and the Middle EastHSBCEuropean Islamic Investment BankIslamic Bank of BritainQIB UKGatehouse BankTotal
Sharia compliant assets, $m2007-08
151941196570648337
9415
18055
% change2009-10
10
-25-49-13---
-27-2
Year-endSep-10Dec-10Sep-10Dec-10Dec-10
---Dec-09
2008-09165371119
698555394
---108
19411
Table 5Assets of Islamic banks in UK
2009-10166991115
524284342
---79
19042
Fully Sharia compliantBank of London and The Middle EastEuropean Islamic Investment BankGatehouse BankIslamic Bank of BritainQIB UK
Islamic windowsABC International BankAhli United Bank Bank of IrelandBarclaysBNP ParibasBristol & WestCiti GroupDeutsche BankEurope Arab BankHSBC AmanahIBJ International LondonJ Aron & Co. Lloyds Banking GroupRoyal Bank of ScotlandStandard CharteredUBS United National Bank
Table 4Islamic banks in UK
% share of Islamic banking in total banking assets in each country
Source: The Banker, Maris Strategies
Chart 3Islamic finance penetration in selected countries
0 10 20 30 40 50 60 70
Oman
Indonesia
Egypt
Turkey
Pakistan
UAE
Iraq
Malaysia
Kuwait
S.Arabia
Bahrain
Bangladesh
MARCH 2012ISLAMIC FINANCE
UK’s identified assets, with a further 6% from BLME and 3% from theHSBC parent bank (Table 5). The 22 Islamic banks in the UK substantiallyexceed that in any other Western country or offshore centre (Table 6).
The Islamic Bank of Britain (IBB) is a retail bank and the only Islamic bankwith a high street presence having five branches and around 50,000customers. IBB’s founding shareholder Qatar International Islamic Banktook full control of the bank in 2011. IBB’s admission to the AIM marketwas cancelled in April 2011.
The Bank of London and The Middle East (BLME) is an independentwholesale Sharia compliant UK bank based in the London. BLME’soffering spans corporate banking, treasury and wealth management thatcomprises private banking and asset management. BLME aims tostrengthen its services and market penetration in the GCC.
QIB UK took on its new branding in 2010 to reinforce its identity withinQIB’s global network. QIB UK offers a range of Sharia compliant financingand investment products for both Islamic and non-Islamic clients alike. Itprovides Sharia compliant investment banking services including tradefinance, private equity and asset management.
Gatehouse Bank is a Sharia compliant wholesale investment bankoperating in capital markets, real estate, asset finance, treasury businessand Sharia advisory services. In 2010, Gatehouse Bank completed morethan £160m in Sharia compliant real estate acquisitions.
Liquidity management Treasury murabaha is a key component ofbanks’ liquidity management. These are usually commodity basedcontracts of the London Metal Exchange traded off exchange. SWIFT, thesociety for world interbank payments, has developed an automatedmessaging standard to support murabaha transactions which is replacinga manual paper process. The challenges faced by Islamic banks withregard to liquidity management have been summarised by MohammedAmin in New Horizon:
● There may be no lender of last resort: in the UK, for example, the Bankof England does not offer Sharia compliant facilities.
● Liquidity requires assets to be structured so that they are resaleable,but Islamic bank assets, for compliance reasons, in practice cannot beresold at face value but only at a discount.
● There is a shortage of Sharia compliant highly rated, liquid, short-termassets that are available to hold for liquidity purposes.
Eleven central banks that are members of the Islamic Financial ServicesBoard agreed in October 2010 to establish the International IslamicLiquidity Management Corp (IILM) to help Islamic financial institutionswork towards an Islamic money market and improve cash management.
Products to have been proposed as candidates for new liquiditymanagement tools include asset-backed structured commercial paper;sukuk repo alternative; and leased asset-backed instrument with strongmarket makers.
www.thecityuk.com 5
*UKIFS estimate for UKSource: The Banker
UK*USAustraliaSwitzerlandFranceCanadaCayman IslandsGermanyIrelandLuxembourgRussia
2210443111111
Number located in each country
Table 6Islamic banks in western countries & offshore centres
Sukuk globalissuance reached new high of $84bn
in 2011
Sukuk are issues of Islamic notes that represent an alternative to conventional bonds. Sukuk issues have expanded strongly in the pastthree years, with Zawya Sukuk Monitor reporting a 62% increase in sukukissuance to $84bn in 2011 from $52bn in 2010 (Chart 4). This follows arecovery from a low point of $20bn in 2008 to $33bn in 2009. Sukukmade a strong start to 2012 with $20bn of issuance in January.
Sustained growth in the sukuk market demonstrates appetite for qualityissuers of sukuk from both Islamic and non-Islamic investors. Agreementin 2011 on a debt restructuring for Dubai World has improved sentimenttowards sukuk in general.
The earlier drop in 2008 was consistent with a broad-based slowdown inglobal capital market activity. There was also a temporary break inissuance in 2008 as a result of a ruling from the Accounting and AuditingOrganisation for Islamic Financial Institutions (AAOFI) that questioned theSharia compliance of some sukuk structures. Prior to 2008 sukuk hadincreased rapidly during the decade.
Zawya indicates that Malaysia is the dominant country in the globalmarket, with issuance totalling $58bn, two thirds of 2011 issues (Chart 5). There were also sukuk issues of $9bn from Qatar, and $4bneach from UAE and Indonesia. Other issues came from Bahrain, Pakistan,Brunei and Kuwait. Some 89% of sukuk were for domestic marketsalthough the 14 international sukuk totalling $8.6bn in 2011 was upfrom 11 sukuk worth $5bn in 2010. Government institutions accountedfor 66% of issuance worth $56bn. The financial sector’s 17% sharetotalling $15bn was significantly up on the 10% share worth $5bn in2010. Notable developments in 2011 included the first sukuk by Yemen;the first short-term sukuk out of Pakistan; and the first sukuk in Jordan.
There were 10 sukuk listings on the London Stock Exchange worth$5.1bn in 2011 and two in early 2012 bringing total current sukuk listingson the LSE to 37 and a value of $20bn (Chart 6). A further six sukuk,previously admitted for trading, have reached maturity and been delisted.Taking account of these, a total of 43 sukuk have been listed on LSE witha total value of $24bn.
Key milestones for the LSE have included the GE Capital sukuk in 2009,the first listed sukuk by a US corporate, and the Kuveyt Turk sukuk, thefirst by a European bank. The first UK corporate sukuk was issued in 2010by International Innovative Technologies (IIT).
Elsewhere, Nasdaq Dubai has 15 listings with a value of $11bn, the mostrecent admission being in December 2009. Luxembourg is also animportant centre with 16 sukuk listings worth $7bn at end-2009.
The Islamic finance industry in the UK is still keen to see a UK sovereignsukuk. While there is strong cross-party consensus in the UK on the needto develop Islamic finance, the UK government in January 2011 reiteratedthe position of the previous government: that the issue of a sovereignsukuk is not judged to provide value for money at the present time (alsosee section on UK government strategy on page 9).
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ISLAMIC FINANCE MARCH 2012
$bn, annual issues (bars)
*January & February 2012Source: London Stock Exchange
Chart 6Sukuk listings at London Stock Exchange
0
2
4
6
8
10
2012*201120102009200820070
2
4
6
8
10
12
Number of issues (line)
London Stock Exchange’s37 sukuk listings
total $20bn
Source: Zawya Sukuk Monitor
Sukuk issues, $bn, 2011
Indonesia
Others
Sukuk issues $84.4bn
Bahrain
Qatar
UAE
Pakistan
Malaysia
S.Arabia
58.1
2.6
9.3
1.92.8
3.7
4.1
2.1
Chart 5 Sukuk issues by country
$bn, annual issues
Source: Zawya Sukuk Monitor, Islamic Financial Information Service
Chart 4Sukuk global issues
0
10
20
30
40
50
60
70
80
90
Jan2012
201120092007200520032001
MARCH 2012ISLAMIC FINANCE
Long term prospects for development of sukuk globally are positive, withsukuk having a key role for both government and the private sector as adomestic source of finance. More widely the commitment to a substantialinfrastructure programme, particularly in the GCC, should be matched bystrong demand from both Islamic and non-Islamic investors.
Islamic funds The market for Islamic funds worldwide rose by 8% to$58bn in 2010 from $54bn in 2009, having doubled in size from $29bnin 2004 (Chart 7). Ernst & Young noted that this reflected money inflowsas well as strength in fixed income, commodities and alternativeinvestments. Weaker returns in 2011, combined with negative sentimentdue to the sovereign debt crisis may have curtailed growth in assets 2011.There are around 800 funds worldwide, up more than threefold from 250in 2004. Ernst & Young estimate that the available pool for Islamic fundsis over $500bn and growing rapidly, so Islamic funds under managementcurrently represent only around 10% of the potential Islamic market.
Saudi Arabia, UAE, Malaysia and Kuwait are the main centres formanagement of funds. Major domiciles for funds are Saudi Arabia,Malaysia, Cayman Islands and Bahrain, but also some European centressuch as Luxembourg and Ireland.
Equity funds account for the largest segment: 39% of funds, followed bycommodities 15%, other investments including alternative investmentsand feeder funds 13%, fixed income 12%, money market 9% andbalanced 2% (Chart 8). Ernst & Young’s analysis indicates that the bulk ofIslamic funds are small scale with 69% of fund managers - 139 out of201 - having less than $100m under management, including a third thathave less than $25m. Fees have fallen from 1.5% in 2006 to 1.0% in Q12011, as a result of competitive pressures (Chart 9).
Eurekahedge estimates that the average return on Islamic equity funds fellfrom 9% in 2010 to -3% in 2011, although returns over the past decadehave averaged 4%a year, higher than global equities which haveaveraged 2% a year but less than bonds 6% a year (Chart 10).
In the UK, BLME launched a real estate fund in 2011. A total of sevenSharia compliant exchange traded funds (ETFs) and two Sharia compliantexchange trade products (ETPs) are listed on the London Stock Exchange.
Previously, new offerings in 2009 included a money market fund by BLMEand a sukuk fund by QIB UK. Other offerings in 2008 included a fund ofequity funds, the first of its type globally by SEI; the first Sharia compliantretail capital-protected equity fund in the UK by Alburaq; and the launchby FTSE Group of the FTSE Bursa Malaysia Hijrah Sharia Index, inassociation with Bursa Malaysia.
Takaful, similar to mutual insurance, is a risk sharing entity that allowsfor the transparent sharing of risk by pooling individual contributions forthe benefit of all subscribers. The global market remains at an early stageof development with premiums estimated to have reached $16.5bn in2011. This includes an estimated $4.5bn generated in Iran where takafulis the compulsory form of insurance, and Ernst & Young’s estimate of$12.0bn for the rest of the world (Chart 11).
www.thecityuk.com 7
Source: Ernst & Young
$bn
Chart 7Islamic funds worldwide
0
10
20
30
40
50
60
2010200920082007200620052004
Islamic fundsworldwide total $58bn
*Includes alternative investments and feeder fundsSource: Ernst & Young based on Zawya & Eurekahedge
Assets under management worldwide, $bn, end-2010
Equity
Balanced
Islamic funds under management end-2010: $58bn
Real estate
Commodities
Moneymarket
Fixed income
Other funds* 8.7
22.6
6.8
7.8
5.3
5.7
1.1
Chart 8Assets managed by Islamic funds
Source: Ernst & Young based on Zawya and Eurekahedge
Average management fee, % of fund value
Chart 9Management fee of Islamic funds
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1.6
2011 Q120102009200820072006
Takaful assets, reported in The Banker’s survey, were $20bn in 2010, upfrom $13bn in 2009. A further rise to $25bn is likely for 2011.
Malaysia and Iran were the largest markets in 2010 with assets of $9.9bnand $4.2bn respectively. Along with Saudi Arabia $3.2bn and UAE$1.5bn, these four countries account for 90% of the global takafulmarket. Other smaller markets for takaful with assets between $100mand $500m include Bahrain, Qatar, Indonesia, Bangladesh, Jordan andKuwait. Penetration of takaful is nevertheless low in these and othercountries with Islamic majorities. Takaful therefore represents a stronggrowth opportunity. HSBC Amanah’s home insurance offering is thoughtto be the main takaful offering in the UK.
Law firms The UK is a major global provider of the specialist legal expertise required for Islamic finance, with around 25 major law firmsproviding legal services in Islamic finance (Table 7).
Professional service firms The largest four professional servicesfirms - PricewaterhouseCoopers, KPMG, Ernst & Young and Deloitte -have each established an Islamic finance team in London providingspecialist services including advice on tax, listings, transactions, regulatorycompliance, management, operations and IT systems.
Education and skills There is a growing global demand for skills asIslamic finance expands and UK institutions are at the forefront ofproviding qualifications for the global industry. Courses in Islamic financeare offered by the Chartered Institute for Securities and Investment,Chartered Institute of Management Accountants, Association ofInternational Accountants and the Institute of Islamic Banking andInsurance. At least 10 universities and business schools offer an Islamicfinance qualification including Aston, Cass, Durham and Reading (Table8).
The Islamic Finance Council UK has developed a Scholar ProfessionalDevelopment Programme’ in conjunction with the CISI. The objective ofthe course is to teach conventional finance to Sharia scholars worldwide.Partners for this programme include the Central Bank of Bahrain and theInternational Sharia Research Academy for Islamic Finance (ISRA) that isbacked by Malaysia’s Central Bank.
The broadening of the global skills base in Islamic finance is intended toexpand the number of qualified practitioners and also the number ofSharia scholars available for Sharia boards. Representation of Shariascholars on Sharia boards is highly concentrated. A survey byFunds@Work found in July 2010 that the top 20 scholars accounted forover 619 board positions, over half of the 1,141 positions available.
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ISLAMIC FINANCE MARCH 2012
*EstimatesSource: Ernst & Young
Takaful premiums, $bn (bars)
Chart 11Takaful global market
0
5
10
15
20
25
2011*2010200920082007200620052004
Rest of world
Iran
0
5
10
15
20
25
Takaful assets, $bn (line)
Source: UKIFS
Addleshaw Goddard LLPAllen & Overy LLPAshurstBaker & McKenzie LLPBerwin Leighton Paisner LLPClifford Chance LLPDLA PiperEversheds LLPFreshfields Bruchaus DeringerHerbert Smith LLPHogan Lovells International LLPInce & Co.King & Spalding International LLPLatham & Watkins LLP
Table 7UK law firms offering legal services in Islamic finance
Linklaters LLPMilbank, Tweed, Hadley & McCloy LLPNabarro LLPNorton Rose LLPPinsent MasonsShearman & Sterling LLPSimmons & Simmons LLPSJ Berwin LLPSNR DentonStephenson HarwoodTaylor Wessing LLPTrowers & Hamlins LLP
Source: Eurekahedge, MSCI, Barclays
Bonds
Equities
Annual % rate of return on assets worldwide
Islamicfunds
Chart 10Rate of return on assets
-40
-30
-20
-10
0
10
20
30
201120092007200520032001
MARCH 2012ISLAMIC FINANCE
GOVERNMENT STRATEGY FOR DEVELOPMENT OFISLAMIC FINANCE IN THE UKLondon has been providing Islamic financial services for over 30 years,although it is only in recent years that this service has begun to receivegreater profile. An important feature of the development of London andthe UK as the key Western centre for Islamic finance has been supportivegovernment policies intended to broaden the market for Islamic productsfor both Sharia compliant institutions and firms with ‘Islamic windows’.
The development of Islamic finance has enjoyed cross party support overthe past decade. There have been two key policy objectives: firstly, toestablish and maintain London as Europe’s gateway to internationalIslamic finance; and secondly, to ensure that nobody in the UK is deniedaccess to competitively priced financial products on account of their faith.
The establishment since 2003 of an enabling fiscal and regulatoryframework in the UK for Islamic finance has been key to facilitating thesepolicy objectives. Initiatives have include:
- The removal in 2003 of double tax on Islamic mortgages and the extension of tax relief on Islamic mortgages to companies, as well asindividuals.
- Reform of arrangements for issues of bonds so that returns andincome payments can be treated ‘as if’ interest. This makes London amore attractive location for issuing and trading Sukuk.
- Initiatives by the Financial Service Authority to ensure that regulatorytreatment of Islamic finance is consistent with its statutory objectivesand principles.
Investors would also welcome a UK Government sukuk as it wouldprovide more liquidity in the secondary market and act as a benchmarkfor UK companies that might consider issuing sukuk. The position of theUK Government remains that a sovereign sukuk would not offer value formoney at the present time.
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Islamic finance: principles &developmentsPrinciplesThe underlying financial principles in Islamicfinance have remained unchanged historicallysince their development over 1,400 years ago.Financial products must be certified as shariacompliant by an expert in Islamic law.Certification requires that the transactionadheres to a number of key principles thatinclude:
● Backing by a tangible asset, usufruct orservices, so as to avoid ‘speculation’ (gharar).Prohibition of interest payments (riba).
● Risk to be shared amongst participants.Limitations on sale of financial assets andtheir use as collateral.
● Prohibition of finance for activities deemedincompatible with sharia law (haram), such asalcohol, conventional financial services,gambling and tobacco.
Modern developmentModern Islamic finance emerged in the mid-1970s with the founding of the first large Islamicbanks. Development initially occurred throughmarketing of a steadily expanding supply ofSharia compliant financial instruments. Thissupply-driven model contributed to relativelyslow growth until the mid-1990s, since whendemand has increasingly driven thedevelopment of Islamic financial instruments.Rising awareness and demand for Islamicproducts, along with supportive governmentpolicies and growing sophistication of financialinstitutions, have together raised the rate ofgrowth.
Source: UKIFS
Aston Business SchoolBangor Business SchoolCass Business SchoolDundee UniversityDurham University and Business SchoolICMA Centre Henley University of ReadingGlamorgan UniversityLondon School of Business and FinanceNewcastle Business SchoolSalford Business School
Table 8UK universities and business schools offeringIslamic finance
Accounting and AuditingOrganisation for IslamicFinancial Institutions (AAOIFI)www.aaoifi.com
CPI FinancialIslamic Business & Finance www.cpifinancial.net
Ernst & YoungThe Islamic Funds & InvestmentsReport 2011The World Islamic BankingCompetitiveness Report 2011-2012The World Takaful Report 2011www.ey.com
Eurekahedgewww.eurekahedge.com
Failakawww.failaka.com
Financial Services Authoritywww.fsa.gov.uk
HM TreasuryThe development of Islamic financein the UK: the Government’sperspective, December 2008www.hm-treasury.gov.uk
Institute of Islamic Banking &InsuranceNew Horizon (quarterly)www.newhorizon-islamicbanking.com
Islamic Banking & Financewww.islamicbankingandfinance.com
Islamic Finance InformationServicewww.securities.com/ifis
Islamic Financial Services Boardwww.ifsb.org
London Stock Exchangewww.londonstockexchange.com
Mushtak Parker AssociatesIslamic Banker (monthly)www.theislamicbanker.com
Pew Research CenterThe Future of the Global MuslimPopulationwww.pewforum.org
Pioneer Publications Islamic Finance Today (quarterly)www.pioneer-publications.com
The BankerSpecial Supplement: Top 500Islamic Financial Institutions, Nov.2011www.thebanker.com
UK Islamic Finance Secretariat(UKIFS)www.ukifs.org
Zawya Sukuk MonitorZawya Sukuk Quarterly Bulletinwww.zawya.com
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ISLAMIC FINANCE MARCH 2012
OTHER SOURCES OF INFORMATION
MARCH 2012ISLAMIC FINANCE
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