London calling

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Denison: the UK government has made great efforts to encourage the use of Islamic financial instruments.

Nigel Denison, director and head of markets for Bank of London and the Middle East, a UK-based corporate and investment bank that launched to customers in July, tells ABF about the new institution's story so far.

What lines of business will Bank of London and the Middle East operate?

We're going to have four business lines. Two of those will be set up this year. They are corporate banking - which includes trade finance, project finance and wholesale finance - and markets & treasury. Early next year we will establish private banking - wealth management and asset management - and then the fourth product line which will come on stream towards the end of next year is investment banking, which includes equity capital market transactions - IPOs and that kind of thing - and the provision of advice for M&As, or, more likely I suspect, helping non-Islamic entities either design Islamic products.

This could be because they wish to access the Islamic investor base, or because they are doing a lot of business in the Islamic world and need to understand how you go about structuring transactions that will be compliant, but don't necessarily want to go to the extent of setting up their own Shariah board. We're now a team of roughly 30 people and that will grow to about 60 by the time all four divisions are up and running.

Your main office is in London, so how will you serve the Middle East market?

To begin with the operation will be purely in London. There are a number of reasons for that, a large part of it is to do with the fact that our largest shareholder is Boubyan in Kuwait, and most of the rest of the ownership is Kuwaiti financial institutions plus a few high net worth individuals. They cover a large part of the region from there, so the idea is that we would be a UK-domiciled and regulated Western-managed bank that would be complementary to their efforts.

Our intention is to try to generate business from Western Europe, but also North Africa, Turkey and other parts of the Islamic world. It's quite likely that we would set up something in Dubai at some point, but it really depends on how business develops, what the client base turns out to be, and what the requirements and demands are. Till then we'll travel from London.

Why was London chosen as the base?

For a number of reasons. London is the major financial centre in Europe, and the UK government has gone out of its way to make adjustments to the tax system to encourage the development of Islamic finance in London. The markets tend to be there, the people are there, the infrastructure is there, and so it was the obvious place to start.

If you're going to set up in Western Europe there is more going on in London in Islamic finance than the rest of Europe put together, by a long way, so it's the logical place to be domiciled. To be honest, there isn't a lot of competition at the moment because a lot of the other Western governments are doing nothing.

Is there a big appetite for Islamic finance in Europe?

Over and above people wanting to use Islamic finance because they themselves are Islamic, we also see a lot of potential for Western companies who do a lot of business in this part of the world wanting to access Islamic finance because they feel it will bring them closer to their customers and being seen to be closer to the spirit of how things are intended, and that's why I wouldn't limit it necessarily to the GCC.

We think the opportunity is fairly broad and we're already working on a transaction that is based in the UK, with a recycler of steel. The connections are two-fold. One is that it's a classic Islamic-type financing where we'll buy an asset and finance it at a profit using murabaha, but there also connections with this part of the world because they export to here.

Is the UK financial environment supportive to Islamic institutions?

The government has been very helpful in encouraging Islamic finance with the tax changes they have made. They want London to be the centre of Islamic finance outside the GCC. The key thing is the tax changes to allow a level playing field. The first change was in the mortgage market on stamp duty, and the second one was in changes to the way sukuk are treated, to allow them to be issued from the UK and treated in the same way as a bond, whereas previously they were being treated more like leases. That's been adjusted, and the government in a further attempt to encourage the market is going to issue its own sukuk within the next 12 months, which will be interesting.

What challenges did you face in setting up a Shariah compliant institution?

We've moved into our permanent premises but even that was challenging because we have a conventional landlord who took some persuading to make certain changes to the lease to make that Shariah compliant. Obviously we can't have any references to penalty interest and things like that, so that took a bit of negotiating.

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