By Melanie Faithfull Kent
General Manager H&K Dubai

In the tabloid loving, populist west the reputation of Islamic finance suffers from its name. Were it called ethical banking it would be an instant hit amongst the world’s middle class consciousness-raising investors who wear ethical cotton and drink fair trade coffee. Political discord between east and west continues to heap suspicion on the sector, which it ill deserves.

Islamic finance is not an ethnic, but an ethical industry. In broad terms it’s like an independently audited quality mark, which ensures the investments, funds or any of the structures protect the interests of the investor, and mutually distribute any gains, or losses; rather like the old cooperative or mutual societies, but with ethical laws that prohibit involvement with morally inappropriate businesses or practices.

Islamic institutions’ actions are government by Shari’a boards, made up of independent legal scholars, which interrogate and sanction its activities, and - through a peer reviewed process - issue updates to the law.

The growth of Islamic Finance is not restricted to the Islamic world. Launched 2006 with an LSE listing and private placement in the Gulf, European Islamic Investment Bank (EIIB) was the first Islamic investment bank in London, with capital base larger than many of its Gulf cousins at USD 389 million.

With Europe-wide investments and a dual-region investor pool the bank’s strategy “…is to bridge the gap between conventional and Islamic institutions,” says Managing Director John Weguelin.

Boundaries are similarly blurring for Essam Janahi from Gulf Finance House who points out that: “The restrictive image of Islamic finance as limited to a particular religion and largely deployed in a certain geographical region is a thing of the past.”

He’s right. There are some 1.6 billion Muslims – but the growth of the industry has already reached far outside the boundaries of the religion, and into the mainstream City of London.

This year UK Prime Minister Gordon Brown used his final budget as chancellor to abolish tax on Islamic bonds – Sukuks - and London has rapidly attracted the interest of Islamic financial world.

March 2007 saw the first billion dollar Islamic bonds issued on the LSE, catapulting global Sukuk values to USD 70,000 million.

But from a communications perspective there is some way to go before perception meets reality. It’s hard to ignore a financial market which despite its self imposed constraints Standard and Poor’s estimates has the potential to grow to some USD 4 trillion.

Whilst the chattering classes smirk about constraints on pork products, the world of Islamic finance – growing at an estimated 20 per cent annually for the last decade - gets on with the serious business of making money, with the UK planning to issue Europe’s first sovereign Sukuk, once consensus and legal structures are in place.

The potential for retail finance is also far from exhausted. Although some 70 per cent of Malaysian borrowing in 2005 was Islamic, in the Middle East it’s around 10 per cent. Given the confluence of demographics and liquidity in the region this number is likely to skyrocket.

And the rocket is coming to a financial centre near you.

Global Islamic assets are estimated to be worth up to USD 400,000 million, giving impressive returns. As the oldest established Islamic financial centre in the Gulf, Bahrain-based banks lead in many rankings, with Arcapita and Gulf Finance House reporting 18.6 % and 14.1% return on assets respectively.

Islamic structures seek to ensure capital is always deployed in wealth creating, morally positive enterprise. Gulf investors active in Europe and the US hold assets ranging from water companies to property portfolios and British luxury carmaker Aston Martin, whose takeover was funded by Investment Dar, one of Kuwait's biggest Islamic investment companies.

The challenge for Islamic finance is that it has to work twice as hard as its conventional counterparts for its success to be recognized and for its adherence to socially-inclusive principles to be acknowledged. The irony is that an industry whose risk exposure is managed by absolute adherence to strict governing principles ahead of any regulator imposed curve is still portrayed as wanting.

Without question, the age of Islamic Finance is here; with time and a great deal of effort we will see its achievements begin to undermine the misconceptions of the cynics, if not aligning perception with reality, at least ensuring that it gets a fair hearing alongside conventional structures.

Islamic financial principles explained
London’s Institute of Islamic Banking and Insurance, explained that the “…economic system envisaged by Islam aims at social justice without inhibiting individual enterprise beyond the point where it becomes not only collectively injurious but also individually self-destructive.” Citibank, HSBC and UBS are three institutions with significant Islamic Finance operations.

• Islam encourages profit creation by entrepreneurial action; rather than through the collection of interest payments, due irrespective of the venture’s success.
• Earnings are generally through the capital gain on a particular asset, or through the recovery of service fees.
• Islamic finance prohibits hoarding; therefore capital sums need to be ‘put to work’ generating wealth and through wealth distribution requirements, benefiting society.
• The concept of shared risk is central to Islamic finance, the business entrepreneur and the capital investor form partnership structures which share both the gains and losses of the enterprise.
• Lenders behave more like investors, rather than issuers of non asset backed credit; they deeply interrogate the opportunity’s up and downside since the institution’s fortunes are linked to that of the investor.
• Islamic institutions are often seen as less ‘generous’ by western consumers, used to being offered many salary multiples on their purchases. This institutional prudence also checks inflation and discourages acquisitive living beyond one’s means.
• In a mortgage transaction the bank buys the house and leases it to the buyer and the title deed is transferred only upon completion of all pre agreed payments. In this way the lender is protected against default, since it owns the asset in question, and the buyer is protected from interest level rises.