Britain is set to the become the first non-Muslim nation to raise money by issuing a government bond-style "Sukuk" compliant with Sharia law as part of a bid to transform London into a global capital of the Islamic finance industry.
David Cameron, the British prime minister, unveiled the scheme along with plans to launch an Islamic market index at the London Stock Exchange as the British capital this week played host to the World Islamic Economic Forum (WIEF), an annual gathering of political leaders, chief executives and delegations from across the Muslim world. "Already London is the biggest centre of Islamic finance outside the Islamic world, but today our ambition is to go further still," Cameron told the event. "I want London to stand alongside Dubai and Kuala Lumpur as one of the great capitals of Islamic finance anywhere in the world." Established in Malaysia in 2006, the WIEF aims to embed Sharia principles at the heart of financial and economic affairs.
Islamic finance requires that deals are based on real assets and forbids usury, the practice of lending money and charging interest, while risk must be shared between both parties to a transaction. "It means you should not be involved with interest, uncertainty and speculation," Dzuljastri Abdul Razak, a professor at the International Islamic University in Malaysia, told Al Jazeera.
"It's basically about building the real economy. You can only sell something that exists. If you treat money as a commodity then there's no asset." Britain is the first non-Muslim country to host the WIEF, and Cameron's presence along with a gala dinner hosted by Prince Charles, the heir to the British throne, and cameo appearances by Boris Johnson, London's extrovert mayor, offered ample evidence of the event's significance to the government. "It's all about sending a message.
It's a message that says, 'Look guys, you want it this way, in London you can have it this way. We're quite relaxed. We're happy about it and we want you to come and do your business here.'" Edward Lister, London's deputy mayor, told Al Jazeera. Cameron said the government was working on the practicalities of issuing a Sukuk - a bond-like financial certificate used to raise money that is based on shared ownership of an asset rather than a promise to pay interest - worth £200 million ($320m) by next year. Though comparatively small, given that the UK currently owes investors more than £1.2 trillion ($1.92 trillion), Mehmet Asutay, an expert in Islamic finance at Durham University, said the announcement amounted to a "huge signal" of the government's commitment to attracting Islamic money, especially from wealthy Gulf states. "Like most European countries, the UK needs capital.
Everyone knows capital is essential for sustainable economic growth and since the global financial crisis the sources of capital in the western world have dried up, but in the Gulf of course there is huge capital available," Asutay told Al Jazeera. But Asutay said global demand for Sharia-compliant financing was still relatively untapped, and the UK was also positioning itself to capitalise on a growing industry. Everyone knows capital is essential for sustainable economic growth and since the global financial crisis the sources of capital in the western world have dried up.
The global market in Islamic finance is currently estimated to be worth about $1.3 trillion, or just one per cent of the world's total financial assets, yet Muslims make up about a quarter of the planet's population. Large Islamic countries such as Indonesia and Turkey are now developing their own financial sectors after years beset by political and economic instability, while potential markets in Africa were also opening up, Asutay said.
Asutay said the UK would face stiff competition from inside the Muslim world, with Kuala Lumpur having already established itself as an Islamic financial hub, and with the World Bank this week opening its first Islamic finance centre in Istanbul. But he said London's traditional strengths as a financial capital and the legal and regulatory security it could offer foreign investors could give it an edge over its challengers.
"The reality is that London has always been an important financial centre regardless of crises and ups and downs. It is open, it is very liberal and it hasn't questioned the religiosity or the ideology of money. Its institutions have been around for longer than some of the countries we are talking about, so that gives London a lot of leverage." Britain's burgeoning Islamic finance sector is already shaping the London skyline, having funded the construction of the Qatari-owned Shard, western Europe's tallest building. Other major London property developments at Chelsea Barracks and Battersea Power Station are also based on Sharia-compliant funding, while 49 Sukuk issued through the London Stock Exchange since 2007 have raised $34bn.
Modern Islamic global finance is a relatively recent invention, dating to the establishment of the Saudi Arabia-based Islamic Development Bank (IDB) in 1975 as an alternative source of funding to the World Bank for Muslim nations. Critics argue that the system amounts to an exercise in theological semantics, creating instruments that look and feel like conventional financial products and fall short of strict adherence to Sharia principles. But Azmi Omar, head of the IDB's research and training institute, said the industry was working hard to address that criticism. "There are fatwas to say that we have to move away from so-called legal tricks, and we have a financial product development centre that is working to resolve some of these issues," he told Al Jazeera. "Islamic banking is still new, so we are still trying to evolve and develop new products that meet the needs of the industry." Advocates argue Islamic finance has the potential to radically transform the global economy, by rooting ethics and social responsibility at the heart of banking and financial affairs.
Dzuljastri Abdul Razak believes that a Sharia-based financial system would not have been prone to the sort of crisis triggered by credit-based speculation in sub-prime debt in 2007 from which the global economy is still recovering. "Islamic finance has an answer to the issues that caused the crisis so it is fitting at this kind of conference that we explore these opportunities," he said. "The strength of Sharia is that there is an ethical dimension, and there is consideration of the people affected."
Sir Iqbal Sacranie, a member of the WIEF's advisory panel and a former secretary general of the Muslim Council of Britain, said the endorsement of Islamic financing would also benefit British Muslims, many of whom have traditionally conducted their personal and business affairs beyond the reach of high street banks, by bringing them into the mainstream economy. Britain has a Muslim population of about 2.8 million, including about one million in London, with a combined spending power estimated at more than $20bn. The government has also launched schemes to offer Sharia-compliant student loans and business start-up loans.
"They were literally keeping funds in cash or in some dodgy investments in the name of Sharia, and people have lost lots of money," Sacranie told Al Jazeera. "Now you have legitimate Sharia-compliant investment opportunities and the Muslim community has been empowered."