Islamic finance roundtable: The new contest to be the capital of Islamic finance

Islamic finance roundtable: Participants

Why is it important for your state to develop its status as an Islamic international financial centre?

JS, Dubai At the moment, there is no obvious frontrunner in Islamic finance in the [Middle East], and we believe that this is an area where Dubai and the Dubai International Financial Centre (DIFC) can take the lead and set a benchmark for innovation and activity, in line with His Highness Sheikh Mohammed’s recently articulated three-year strategy of Dubai becoming a global capital of the Islamic economy.

The initiative illustrates the emirate’s commitment to diversifying the UAE economy and establishing Dubai as a global leader in the Islamic economy, focusing on several sectors including finance, the halal food industry, family-friendly tourism, the digital economy, fashion, economic education, and standards and certification.

SW, UK Islamic finance is growing 50% faster than traditional banking and global Islamic investments are set to grow to £1.3 trillion [$2.14 trillion] by 2014. But the UK government believes that the sector has even greater potential, and we want Islamic finance to achieve that potential here in the UK.

As the most international financial and business centre, with a leading position in emerging markets, we want to make sure a big proportion of those investments are made in and through the UK. And engaging in Islamic finance is also an important part of the government’s strategy to diversify and rebalance our economy, working with new markets and taking advantage of emerging trends.

AK, Istanbul In terms of being a financial centre, Istanbul draws its road map to be a regional hub and global actor at the beginning and then to be a global financial centre.

Istanbul is a safe haven that can attract savings from the Gulf region. This is going to be the first step in attracting long-term investments from the Gulf area to help Turkey to cope with its current-account deficit problem

NM, Luxembourg Islamic finance is a natural diversification for the financial centre, calling on skills that form the core of Luxembourg’s expertise: creativity in asset structuring, international real estate investment and cross-border distribution of financial products and services.

Luxembourg is already recognized as the leading Islamic fund centre outside the Muslim world. According to the 2013 Lipper global Islamic asset management report, it lies in third place globally, both by the number of funds (111) and assets under management ($4 billion).

What makes an attractive financial centre for Islamic finance?

KH, Bahrain Clearly there are some legal and regulatory hurdles that can prevent centres from reaching their potential. Stamp duty is a particularly well-known example of a law that can cause problems for Shariah-compliant investment and where many jurisdictions will need to adapt legislation to avoid unfair charges being imposed on many Islamic finance transactions.

Finally, as with any financial centre, Islamic finance will not thrive unless there is an experienced, well-trained local workforce in place. After all, it isn’t the buildings that matter: it’s the people you put in them.

NM, Luxembourg Any financial centre that reaches the short list must have a legal framework that accepts the concept of Islamic products and services, a network of tax treaties with the appropriate countries and a body of knowledgeable service establishments.

However, the deal is likely to be clinched by two further factors that are regularly cited as of top priority by Islamic investors: stability and political support. Stability – evidenced by political and fiscal continuity – is the first priority. This is closely followed by high-level political engagement. Islamic investors expect easy access to the relevant authorities and for these authorities to create a level playing field by confirming or adopting an appropriate legal and tax framework.

JS, Dubai The attractiveness of any financial centre is reliant on a combination of factors – the need for a market, strong regional growth and a robust infrastructure offering. These, coupled with soft infrastructure, such as legal and regulatory structures that aid and ensure market activity and growth, are critical to the success of an Islamic finance – or other financial sector – centre. In our case, DIFC works closely with the Dubai Financial Services Authority (DFSA) to ensure that legislation and regulations are updated to support the growth of Islamic finance.

What makes your state attractive for the industry?

AK, Istanbul Historically and culturally there has been substantial knowledge in Turkey of Islamic finance and financial practices since the Ottoman period. Turkey’s geographic and political proximity to Europe and the Gulf countries increases its chance of becoming a centre.

NM, Luxembourg Luxembourg combines a high level of physical security (the city is frequently nominated safest city in the world), together with exceptional political, economic and social stability.

Reporting lines to the top level of government are short and access to informed decision-makers is not difficult. The tax directorate has ensured equal treatment for Shariah-compliant structures and is prepared to sign pre-launch tax rulings.

Another important attraction is the legal framework, which offers a range of Shariah-friendly structures along the full spectrum from EU retail funds through to non-regulated structures suitable for sovereign and quasi-sovereign investors.

SW, UK Sitting between the US and Asian time zones allows London to work virtually around the clock and helps create what I have called an Islamic finance market that never sleeps. The UK’s tradition of openness and access means there are over 1,400 financial services [companies] in the UK that are majority foreign owned, from around 80 countries. London has more foreign banks than any other centre, with high-quality professional and support services, and strong infrastructure. If you want to do business with the rest of the world, all you have to do is come to London.

JS, Dubai As a gateway between east and west, with an advantageous time zone and world-class infrastructure, Dubai is very well positioned to become a hub for Islamic finance.

Do you expect to have a specific niche within Islamic finance?

NM, Luxembourg The Luxembourg financial centre is fully diversified, supplying the needs of an industrial sector that includes world leaders such as ArcelorMittal, SES Satellites and Cargolux.

Nevertheless, there is a natural tendency to attract business in those sectors for which it has an international reputation: capital market listings (sukuk), private banking, structured finance and investment funds.

Two other areas have the potential to develop into key sectors. The recent launch of a cross-border life assurance product reflects one of Luxembourg’s main business lines: 90% of premiums in conventional life assurance are from cross-border business. The other area to watch is high-net-worth banking.

SW, UK There is a valuable role for the UK to play as a thought leader in further articulating how a faith-based form of finance, originating in countries with majority Muslim populations, can develop in a country with a Muslim minority and a secular legal framework. In this respect, the UK model might eventually become standard among jurisdictions without majority Muslim populations.

This will help integration of Islamic finance with global markets, and ensure efficient allocation of capital on a global scale.

JS, Dubai DIFC offers a platform to service the various needs of the Islamic finance industry, including banking and capital markets, sukuk issuance and other corporate banking requirements. In addition, it has created the right business environment to meet growing demand from the Shariah-compliant asset management industry and Shariah-compliant insurance (takaful).

The DFSA has developed a unique Shariah systems model, which provides a regulatory structure to ensure compliance with international standards as well as Islamic law. One notable underpinning is the law regulating Islamic financial business. Under this law, any firm conducting Islamic financial business must have a special endorsement on its licence, which allows the firm to operate as a wholly Islamic firm or as an Islamic window.

KH, Bahrain Bahrain is a full-service financial centre, and this is reflected within Islamic finance, where we are home to 24 banks whose assets under management total $26.2 billion, eight Islamic insurance companies and 50 Shariah-compliant funds.

This will continue to be the case, but as with elsewhere in financial services, we are expecting strong demand within those financial sectors that cater to the needs of the rapidly expanding mass-affluent population in the Gulf. As we see a greater demand for more sophisticated financial services, it is likely that a proportion of this will be for Islamic financial products.

What have been your main recent milestones as an international Islamic financial centre?

AK, Istanbul Since 2003, ground-breaking developments have been achieved [in Turkey] in terms of interest-free investment products, meaning special finance institutions and participation banks [the equivalent of Islamic banks, as regulated in Turkey], capital markets products and services.

The creation of the first stock market transactions for these institutions, mutual funds, [the] Dow Jones Islamic Market Turkey ETF, and Turkey’s first Islamic index, the Participation Index, are among these.

The World Bank’s Global Centre for Islamic Finance will be founded in Istanbul [as announced in October 2013, in partnership with the Turkish government, as a training, advisory and technical assistance body].

SW, UK The UK has already worked hard to create an advanced regulatory and tax regime that provides a level playing field for all forms of finance, which has included removing the double tax on Islamic mortgages and extended tax relief on Islamic mortgages to companies as well as individuals. And in March 2013 I established an Islamic finance task force to reinvigorate the UK industry and support delivery of the World Islamic Economic Forum (WIEF), which for the first time was hosted outside the Islamic world [in London in October 2013].

On October 29, the London Stock Exchange Group announced it was launching a world-leading Islamic market index; strengthening FTSE’s leading position as a developer of innovative, alternatively weighted indices. This index will be another global first for the City of London. Using some of the most advanced techniques, it will allow investors to identify Islamic finance opportunities.

Another important development was the launch of the first Shariah-compliant underwriting agency on the Lloyd’s market, Cobalt Underwriting, which recently underwrote its first risk. Insurance is a core pillar of financial services, helping business manage risks, and the government is committed to developing London’s expertise in Islamic insurance and to working with insurers and wider partners to consider options to grow the market.

NM, Luxembourg The decision by the Central Bank of Luxembourg, in 2010, to join the IFSB [Islamic Financial Services Board], to host the IFSB annual meeting the following year and to be a founding member of the IILM [International Islamic Liquidity Management Corporation] sent a strong message to Islamic markets. The stated goal of the [central bank] was to gain experience in the regulation of Islamic banks in advance of being required to do so.

Likewise, the purchase by Qatar’s Precision Capital of two big Luxembourg banks, KBL Private Bankers and BIL, Banque International à Luxembourg, in 2012, sent a message to other Muslim markets and provided a boost to the domestic Islamic community.

Innovative product launches have included the first Shariah-compliant sustainable forestry fund and the first EU retail fund to invest in an international Islamic sukuk portfolio.

What have you done up to now to cultivate your status as an Islamic international financial centre?

KH, Bahrain Bahrain has been a pioneer in a number of areas of Islamic finance. In 2001, the kingdom became the first country to develop and implement regulations specific to the Islamic banking industry. In the same year, the Central Bank of Bahrain’s predecessor, the Bahrain Monetary Agency, became the first central bank in the world to develop and issue sukuk.

As well as this history, Bahrain is also home to many of the leading [international] organizations within Islamic finance, including the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI), International Islamic Financial Market (IIFM), the General Council for Islamic Banks and Financial Institutions (CIBAFI), Islamic International Rating Agency (IIRA), Thomson Reuters Global Islamic Finance Hub and Deloitte’s Islamic Finance Knowledge Centre. Bahrain is also the home of the global Islamic finance arm of Ernst & Young.

A good example of how this cluster can work to benefit the wider international industry was the recent development of the Tahawwut Master Agreement by IIFM and Isda [the International Swaps and Derivatives Association], which provided a Shariah-compliant hedging framework.

There was a real need, as the industry expanded and institutions took on larger positions, for an agreed framework on hedging. The Central Bank of Bahrain worked very closely with IIFM (of which I am fortunate to be the chairman) and the industry to help to develop an answer to this need.

The concentration of expertise and long track record among institutions and banks mean that Bahrain is well placed to continue to develop these sorts of solutions.

JS, Dubai Let’s not forget that Dubai is no stranger to Islamic finance – it pioneered the field with the creation of Dubai Islamic Bank in 1975. DIFC has helped establish Dubai as one of the leading centres of Islamic finance in the region, with a number of Islamic finance institutions already present and new firms choosing to establish themselves here.

DIFC had an early start on the laws and regulations around Islamic finance and a number of firms have located to the centre to be involved in the industry. There are many products that are being created out of the DIFC that are tailored for Islamic investors and are then regulated by the DFSA.

DIFC is well placed to cultivate Dubai’s status as an Islamic international financial centre. For example, DFSA’s Sharia systems method of regulation provides flexibility for firms seeking to offer products through an Islamic window or to operate as an Islamic institution. There is no central Shariah board, but firms are required to nominate their own Shariah supervisory board and make appropriate disclosure to clients. Our last important measure was to remove the obligation for Islamic firms to use AAOIFI standard of accounting as a consequence of lobbying by the Islamic industry.

AK, Istanbul In the past 10 years there have been many developments in products and legislation. Participation banks worked within banking laws causing these banks to expand their areas of operation. Fall in yields caused a change in perspective as regards investment products and made [Islamic finance] more attractive [to issuers]. Growth of pension funds brought along depth in the [Turkish] market and the hope of increasing stability.

The capital markets law, restructuring of the stock market and investment products are important developments. But the biggest development is the Turkish Treasury’s issues of dollar-denominated and lira-denominated lease certificates [sukuk].

NM, Luxembourg The attitude of the regulatory authorities is business oriented: always willing to discuss an innovative structure or investment approach, they have not tried to impose any particular school of Shariah law but are willing to authorize any interpretation, provided that it does not contradict Luxembourg – and by extension EU – legislation.

What further initiatives can we expect from you in the near future?

SW, UK Underlining the UK government’s support for Islamic finance, at the World Islamic Economic Forum the prime minister [David Cameron] announced that he wanted the UK to become the first country outside of the Islamic world to issue an Islamic bond. So the UK Treasury is working on the practicalities of issuing a bond-like sukuk worth around £200 million. We welcome the involvement of industry in developing this initiative, which we hope to launch in 2014.

We are already a global player in Islamic finance, but I want us to be an even bigger force in this area. My aim is to move from a UK focus to a global focus. I will work with our global partners to identify the key factors that will drive the Islamic market over the next five years. And we want to work with those partners to spearhead that growth.

To help achieve this, I will be bringing together the key decision makers and experts from the public and private sectors [including CEOs and central bank governors from Kuwait, Bahrain, Qatar, UAE, the UK and Malaysia] into a global Islamic finance and investment group to look at the key questions and issues.

JS, Dubai While 2014 marks DIFC’s 10-year anniversary, Dubai has also been selected as the venue to host the 10th World Islamic Economic Forum [in 2014], one of the most prominent global events for every aspect of the Islamic economy.

In addition, three members of the board of directors for Sheikh Mohammed bin Rashid Al Maktoum’s Dubai Islamic Economy Development Centre now sit on DIFC’s higher board of directors, including His Excellency Essa Kazim, the recently appointed governor of DIFC.

KH, Bahrain You can expect increased investment in education and research, ongoing work to align conventional and Islamic standards in accounting and auditing, and continual development of the sukuk market as sovereign issuance continues to aid issuance from a number of corporates.

NM, Luxembourg A number of important projects are in the pipeline for 2014, which will take the Luxembourg Islamic finance sector to a new level.

Where existing business is concerned, we expect to see a recovery in volumes to pre-crisis levels. In the area of private banking, we expect to see an increase in entrepreneurial customers from Muslim countries in line with a steady market shift in this direction.