LONDON: Islamic ambition

Competition is fierce for a slice of the expanding Islamic banking sector. Bahrain, Dubai, Kuala Lumpur and now London are all lining up to be the world's Islamic banking hub.

'London is developing Islamic finance in partnership with the Gulf,' says John Stuttard, alderman of the Lord Mayor of the City of London. 'Institutions are looking at London as a source of finance and we need to make sure we develop [the regulatory framework] for sukuk and takaful. Fiscal changes have been made to allow for the development and listings of sukuks.'

Just as City lawyers are flocking to Dubai to beef up their Islamic finance advisories, the UK authorities are encouraging Islamic banking institutions to set up in London. The latest arrival and first Islamic investment bank in the UK is the European Islamic Investment Bank (EIIB). The institution's launch in early 2006 was a major step forward for British Islamic banking, an arena dominated by retail products and services.

With a capital base of 200 million ($389 million), EIIB is larger than many of its Gulf-based competitors. Its pan-Europe remit means it is a keystone in the UK capital's quest to be a centre of Islamic finance activity. 'Islamic finance in Europe is concentrated in the UK,' says Standard & Poor's analyst Anouar Hassoune. 'There's not much on the ground in continental Europe.'

The Financial Services Authority (FSA) is actively encouraging the growth of Islamic finance to meet its inclusion criteria, serving the needs of British Muslims. But it also wants the capital to take advantage of the existing $70,000 million global sukuk market and the $20,000 million of Islamic bonds expected to be issued by 2010.

To date, only $15,000 million worth of sukuks are listed, and most of those are on the offshore Dubai International Financial Exchange. 'London is positioning itself early. I won't be surprised if in the future sukuks are listed on both London and Dubai exchanges. In the West, London is where sukuks will take off,' says Hassoune.

EIIB is aiming for a slice of that market. 'We are working on a potential opportunity,' says EIIB managing director John Weguelin. 'Sukuk investors are more familiar with them than borrowers. From a UK perspective, the issues are not that great for the FSA to accommodate Islamic institutions. It makes no allowance for the fact that institutions are Islamic. The biggest issues are discussions surrounding products.'

But Gulf investment banks have a key advantage. They sit next to a captive sharia-compliant investor base. To gain a competitive edge, EIIB is broadening its scope. 'We get approached by large conventional institutions to structure Islamic products for them and to put deals together,' says Weguelin. 'Our strategy is to bridge the gap between conventional and Islamic institutions. Conventional investors take up a large percentage of sukuks.'

And the new bank is located within a robust regulatory framework with access to structuring and securitisation expertise. It is also able to tap Gulf liquidity from London. What EIIB does not have and what is required for London to gain critical mass as an Islamic finance centre is domestic competition.

Victoria Robson