Banking on piety

Majid Dawood, CEO of Sharia-compliant consultants Yasaar.

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Malaysia: the leader in corporate sukuks but the GCC is catching up fast.

Your friendly Islamic investment banker is at your service

While many Muslim scholars have reservations about Sharia-compliant finance, the Islamic finance industry has been expanding by 15% a year, according to accounting firm KPMG, and is set to reach the US$1 trillion by 2009. Islamic banks form the crux of the industry, controlling assets estimated to exceed US$400bn.

Dubai Islamic Bank opened its doors in 1975, and now has a market capitalisation of US$8bn. Its success has been emulated all around the Muslim world and, more recently, beyond. This July, Bank of London and the Middle East (BLME), a UK-based institution with a large Kuwaiti shareholder base, launched one of the first Sharia-based banks in Europe. Nigel Denison, the head of markets at BLME says: "The market is growing rapidly, and it is growing quicker than the conventional market."

If you try to imagine an Islamic banker, you wouldn't think of Denison. Islamic banking is no longer the under the purview of scholars and pious quant types; conventional bankers from around the world have taken an interest. Denison admits that he is a newcomer, but being new doesn't put him or his team at any knowledge disadvantage. BLME puts all new hires through a rigorous course of study, the IFQ (Islamic Finance Qualification), a test that is run in tandem by the University of Beirut and the Securities Investments Institute in London. Getting your employees to know Sharia is a matter of education, but operating an Islamic bank in London has other less noticeable challenges.

Denison recalls that the simplest of tasks require extra diligence. A Sharia-based institution cannot have penalty interest clauses in its lease, so the lawyers have to amend the documents, and convince landlords that the Islamic substitute will adequately protect them. Even photocopier leases have to be Sharia-compliant. While the growth of Islamic banking remains unquestioned, expansion into London may seem odd. Denison points out that the Kuwaiti backers of BLME are looking towards Europe to diversify their revenue streams from financing property in the GCC, and enter untapped markets. "There is a much broader potential for Islamic finance than just assets from the GCC. We are looking to do business away from the GCC. We will focus on Western Europe, North Africa, Turkey, Kazakhstan and Central Europe."

The main challenge that this seasoned banker sees is the lack of standardisation in products, procedures, and documentation. Ambitious strides have been made in this realm, because the cost incentive is strong. There is no way to reduce the number of documents necessary for a certain transaction, and as we have shown with the typical murabaha deal, multiple contracts must be drawn up to ensure compliance. Standardising these documents will lower costs, and bring the price of Islamic finance products in line with conventional banks.

"Although we all use documents that are similar, they're all slightly different as they are all approved by our respective Sharia boards all of whom have a slightly different take on things. Once we get to a point where there is one single document that is universally accepted, as it has with the derivatives, and that will improve standards and increase liquidity."

BLME is only one example of the proliferation of Sharia-compliant banking across the globe. Takaful, or Sharia-complaint insurance, is the newcomer to the scene, and the insurance pioneers are dealing with a far more difficult set of problems, but are also entering an exciting underdeveloped playing field.

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