ISLAMIC FINANCE KEY TO ENSURING LONDON AS TOP FINANCIAL

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SENSITIVE
SIPDIS

E.O. 12598: N/A
TAGS: EFIN ECON EINV KISL UK
SUBJECT: ISLAMIC FINANCE KEY TO ENSURING LONDON AS TOP FINANCIAL
CENTER


1. (SBU) Summary: The British government is promoting the growth of
the Islamic finance industry in the UK, although HMT has decided
against issuing a sovereign Islamic finance bond, a sukuk, in the
current economic climate. HMG is courting Islamic finance, and
eliminating barriers to its growth, to ensure London preserves its
standing as a top financial center, despite the financial crisis.
Islamic financiers, pleased with HMG's efforts, are also pressing to
advance their presence in the UK. End Summary

Pursuit of Islamic Finance
--------------


2. (SBU) HM Treasury's policy objectives, released in December 2008,
are to establish and maintain London as the gateway for
international Islamic finance and to ensure that no person in the UK
is denied access to competitively priced financial products on
account of their faith. Islamic finance describes financial
transactions in accordance with Islamic law (Shari'a). The key
principles: prohibit the payment or receipt of interest; prohibit
uncertainty or speculation; prohibit financing economic sectors
considered to be socially detrimental; share profits and losses; and
underpin financial transactions with identifiable and tangible
underlying assets. HMG perceives supporting Islamic finance as a
way to differentiate London from New York and advance London's image
as the world financial center. London, being closer to the Middle
East, has both a physical and time zone advantage over Wall Street,
as well as necessary Islamic finance back office skills already
present, which HMG is looking to exploit.


3. (SBU) The Bank of England first identified the potential for
Islamic financial instruments in the UK in 2000. Since then, the
Financial Services Authority (FSA),the key regulator of financial
services in the UK, and HMT have introduced legislative changes to
eliminate unfavorable tax treatment of Islamic financing structures
and create a "level playing field". London also hosted the First
Annual World Islamic Banking Conference European Summit in July
2008, and the government-sponsored organization UK Trade and
Investment (UKTI) served as the conference's strategic partner and
provided a specific UK pavilion. The UK now has the only
stand-alone Islamic financial institution in the EU, the Islamic
Bank of Britain. According to government figures, the UK has the
highest value of Shari'a compliant assets (over BPS 18 billion
worth) of any non-Muslim country and the eighth largest amount in
the world. It is difficult to determine the exact size of the
global market but the amount of assets under Islamic management
worldwide has grown from $150 billion in the mid-1990s to around
$700 billion in 2007, according to an HMT source. Prospects for
growth from a Standard and Poor forecast assesses the industry to
potentially contain up to $4 trillion of assets. Other estimates
put growth figures even higher, since Muslims account for 20 percent
of the world population. Presently only about 1percent of global
financial assets are controlled under finance compliant with Islamic
law.


4. (SBU) HMG, to overcome barriers to the growth of Islamic finance
in the UK, is reforming taxation and regulatory codes; forming a set
of commonly accepted standards for products and practices; raising
awareness of the existence and availability of Islamic products; and
ensuring a steady flow of personnel skilled in Islamic finance. The
UK Islamic financial market is mainly aimed at British and
international Muslims, but Islamic financial instruments are
available to everyone. Products include the sukuk, an alternative
investment bond; takaful, a Shari'a compliant mutual insurance
arrangement, which was just launched in Britain for automobiles, a
global first; and murabaha, a purchase and resale contract that
functions similar to a mortgage.


5. (SBU) HMT decided in November, as announced in its 2008
Pre-Budget report, to not issue a sovereign sukuk because it
currently "would not offer value for the money." Nonetheless, HMG
pledged to keep the situation under review and wrote the UK
government "remained committed to promoting the UK as a center for
global and Islamic finance." The government plans to introduce new
legislation into the 2009 Finance Bill to provide further tax
relief. In a recent paper, HMG reiterated it would continue to
examine the feasibility of issuing sovereign wholesale and retail
Islamic finance products.
Muslim Investor Preference for the UK
--------------


6. (SBU) For investments in Islamic finance made outside the Middle
East, the UK is the preferred locale, according to conversations at
closed roundtables hosted by the Centre for the Study of Financial
Innovation (CSFI). The underwriting director at a London-based
Shari'a-compliant insurance group stated many investors feel London
is already the center of Islamic finance. Additionally, experts
from outside the UK, who come to London to sit on boards composed of

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Shari'a scholars for UK-based Islamic finance businesses, are well
connected to London, where many already have homes. There is a
concept of 'London-Istan,' a CSFI director told us. Investors see
the UK as the best place to start expansion into Europe because of
the higher degree of openness, the support the UK government and FSA
offer, and the belief that UK business models and products could be
replicated throughout the EU.


7. (SBU) Clive Briault, the FSA's former Managing Director of Retail
Markets, recently stated "English law is already the preferred
jurisdiction for Islamic transactions." A strategic director for an
Islamic finance company claimed at a closed conference sponsored by
CSFI that the UK's large Muslim population offers an additional
appeal for setting up shop in Britain, as Islam is the country's
fastest growing religion. Most experts attending the conference
agreed that since UK Muslims are engaged with their religion,
Islamic finance products offer an additional way for them to further
connect.
The Effect of the Financial Crisis
--------------


8. (SBU) The financial crisis has heightened HMG's desire to court
Islamic finance, but to date, the government has only done so
largely through public rhetoric, rather than deeds. "In these
times, it is more important than ever that we make the most of
growing sectors like Islamic finance," the Chief Executive of UKTI,
Andrew Cahn, stated in a November. UKTI has supported moves of the
Association of Corporate Treasurers (ACT) to educate UK companies on
the Islamic finance sector and its opportunities for growth during
the financial crisis. ACT Chief Executive Richard Raeburn noted
that the reduction in funding options and the more expensive rates
in conventional markets made seeking alternative funding an
increasing trend. "The credit crunch has made an understanding of
the [Islamic financial] market essential," he said. HMT asserted in
a December government paper that the financial instability in the
global economy must not deter the government from its long-term
objective for Islamic finance, and HMG will continue to support the
development of Islamic finance in the UK.


9. (SBU) At separate Islamic finance events in the last months, the
question was raised whether the credit crunch would have happened
under an Islamic system. Experts argued that in a purely Shari'a
compliant system, the financial crisis would not have occurred.
Mohammed Amin, director of PricewaterhouseCooper's UK Islamic
finance division, pointed out that Islamic practices based on
Western products inherently could possess the same faults. However,
in his opinion, some basic principles innate to Islamic finance
should make a preventable difference, such as lending to only those
who can afford it; using the right 'just' price instead of the
market price; and following standards against complicated contracts
and speculative activity.
Comment


10. (SBU) Comment: Islamic finance is a small but growing sector,
which the UK is actively pursuing, to preserve and increase London's
credentials as the seat of global finance. Should London
successfully position itself as a leading Islamic finance center, it
could gain an edge on New York, when the global financial markets
recover. With the UK's fast-growing Muslim minority, HMG also
recognizes the potential political and electoral advantage of
courting Islamic finance.

TUTTLE