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The global market for Islamic financial services, as measured by shariacompliant assets, is estimated by IFSL to have reached $951bn at end-2008,25% up from $758bn in 2007 and three quarters up on the 2006 total(Chart 1). However, 2009 may have seen a pause following strong growth ofprevious years. Commercial banks account for the bulk of the assets withinvestment banks, sukuk issues, funds and takaful making up the balance.

Key centres are concentrated in Malaysia and the Middle East including Iran,SaudiArabia, Malaysia, Kuwait, UAE and Bahrain (Chart 2). Islamic financeis also developing in Asian countries such as Bangladesh, Pakistan andIndonesia, as well as North African countries such as Sudan and Egypt. TheUK, in 8th place, is the leadingWestern country and Europe’s premier centrewith $19bn of reported assets, largely based on HSBC Amanah. Assets inother Western countries are currently small but a number of countries,particularly France, are looking to develop a presence in Islamic finance.

While the Islamic finance industry initially has been less affected by thefinancial crisis and global economic downturn, there are ongoing challenges,particularly for the sukuk market and for some Islamic banks. The sukukmarket fell back in 2008, but despite recovery in issuance to $20bn during2009, is being tested by its ability to deal with several defaults. A $10bn loanby Abu Dhabi staved off the threat of a potential default by Dubai World onits repayment on the Nakheel $4bn sukuk in December 2009. Quality issuersof sukuk continue to attract demand from investors.

Islamic banks have not been immune to the effects of the financial crisis anddownturn: some have suffered a higher rate of non-performing loans thanconventional banks, mainly due to their exposure to falling real estatemarkets. Revenue and profitability has suffered in both 2008 and 2009 andliquidity is a significant restraint for some banks.

Islamic banks have not been immune to the effects of the financial crisis anddownturn: some have suffered a higher rate of non-performing loans thanconventional banks, mainly due to their exposure to falling real estatemarkets. Revenue and profitability has suffered in both 2008 and 2009 andliquidity is a significant restraint for some banks.

- 22 banks including five that are fully sharia compliant, more than in anyotherWestern country. Two Islamic banks were granted licences in 2008.
- 20 Sukuk issues raising $11bn listed on London Stock Exchange,exceeded only by Dubai Nasdaq.
- Seven sharia compliant exchange-traded funds (ETFs).
- 20 law firms supplying services in Islamic finance.-
- Advisory services provided by Big Four professional service firms.
-Institutions offering educational and training products in Islamic finance.
- Off-exchange trading in commodity-based agreements linked to LMEcontracts.


As mentioned in the overview, IFSL estimates that the global market forIslamic financial services, as measured by sharia compliant assets, isestimated to have reached $951bn at end-2008, 25% up from $758bn in 2007(Chart 1). Assets have grown from about $150bn in the mid-1990s. Islamiccommercial banks accounted for 74% of the assets, investment banks 10%,sukuk issues also 10%, funds 5% and takaful 1%.

Assets that can be allocated to individual countries from The Banker’ssurvey of 500 organisations reveal that the leading countries for shariacompliant assets are Iran with $293bn, Saudi Arabia $128bn and Malaysia$87bn (Table 1). These are followed by other Gulf states including UAE,Kuwait, Bahrain and Qatar. The UK, in 8th place, is the leading Westerncountry with $19bn of reported assets, largely based on HSBC Amanah.Countries with most of the 302 firms reporting to The Banker’s surveyinclude Malaysia with 37, Bahrain 34 and Kuwait 30. Iran, Sudan, SaudiArabia and Indonesia each have between 20 and 23 firms supplying Islamicfinance (Table 1).

Broadening geographical customer base for Islamic services The market iscurrently most developed in Malaysia, Iran and the majority of countries thatform the Gulf Co-operation Council (GCC). However, Islamic finance ismoving beyond its historic boundaries in these countries into new territories.Markets where Islamic finance is developing include:

- Other countries in the Middle East and North Africa such as Turkey,Sudan, Egypt, Jordan and Syria.
- Other Asian countries such as Indonesia, which has the largestindigenous Muslim population in the world, as well as Hong Kong,Singapore, Bangladesh, Pakistan and China.
- Western countries in Europe and North America. Countries such as theUS, France, Germany and the UK each have indigenous Muslimpopulations of between one and five million, although Russia has muchthe largest in Europe with 30m. The customer base in Western countriesis not necessarily restricted to Moslems: other customers may beattracted by the ethical and environmental basis of Islamic finance.

Following the lead set by the UK, otherWestern countries, such as Japan andFrance, are looking to make the appropriate regulatory and legal reforms thatwould facilitate provision of Islamic financial products. London is seeking toconsolidate its position as the gateway to Islamic finance in Western Europe.Providers in London are likely to focus on services that complement thoseavailable in other centres. Government strategy for the development ofIslamic finance in the UK is set out on page 7.

Sharia compliant financial services

Banking and sukuk - the issue of Islamic notes - represent the forms ofIslamic finance that are most well established, although takaful (insurance)and funds are also evolving. Products that may be the subject of innovationinclude private equity and private wealth management.

Banking Islamic banks have been perceived favourably since the onset of thefinancial crisis in 2008 as they have been less exposed to losses frominvestment in toxic assets. However, they have not been immune from theeffects of the crisis and the subsequent economic downturn. Some Islamicbanks have suffered a higher rate of non-performing loans than conventionalbanks, mainly due to their exposure to falling real estate markets. Revenueand profitability has suffered in both 2008 and 2009 and liquidity is asignificant restraint for some banks.

In its World Islamic Banking Competitiveness Report 2009/10 McKinsey &Company recommended that many Islamic banks need to take action in anumber of core areas in order to:

- Enhance and diversify their business mix, by tapping into new businesslines such as personal finance asset management and various areas ofinvestment banking.
- Upgrade risk management in order to address credit and liquidityconstraints. This would also include avoiding excessive exposure to realestate.
- Reduce operational costs and improve service quality to maintaincompetitiveness.
- Explore growth opportunities in the international markets, especiallywhere any excess capital can be better deployed in underdevelopedmarkets.

Islamic banks compete not only with each other but also with all other banksoffering conventional finance, particularly those that have establishedIslamic ‘windows’. In the Banker’s survey, balance sheet assets of shariacompliant banks rose 29% from $622bn in 2007 to $800bn in 2008, of which$701bn were in commercial banks and $99bn in investment banks.

In the UK, five fully sharia compliant banks have been established putting itin the lead in Western Europe (Table 2). The Islamic Bank of Britain (IBB)became the first stand-alone retail Islamic bank in the country in 2004 andwas followed between 2006 and 2008 by The European Islamic InvestmentBank (EIIB), The Bank of London and The Middle East (BLME), EuropeanFinance House and Gatehouse Bank. IBB is the only bank with a high streetpresence having eight branches and around 50,000 customers. EIIB providesinvestment banking services including trade finance, private equity and assetmanagement. BLME offers Sharia compliant investment, corporate andprivate banking to businesses and high net worth individuals globally.European Finance House offers a range of investment products and servicesto clients that include companies and wealthy investors. Gatehouse Bank is awholesale investment bank operating in capital markets,institutional wealth management, Treasury business andadvisory services.

In addition to the five sharia compliant banks, there are anestimated 17 conventional banks that have set up windows inthe UK to provide Islamic financial services (Table 2). HSBCAmanah is the only conventional bank with an Islamicwindow to report to the Banker’s survey: its assets of $16.5bnaccount for 85% of the UK’s identified assets, with a further6% from BLME and 4% from the HSBC parent bank.

The 22 Islamic banks in the UK substantially exceeds that in anyother western country or offshore centre (Table 4). The UK market forIslamic mortgages has grown to about £500m, some 0.3% of the total UKmortgage market.

Sukuk are issues of Islamic notes that represent an alternative toconventional bonds. Issuance of sukuk increased rapidly from $1bn a yearin 2002 to $34bn in 2007 (Chart 3). In common with the broad-basedslowdown in global capital market activity, sukuk issuance fell awayduring 2008 to $15bn, as a result of a decline in asset valuation, a lack ofliquidity and a lack of market confidence. The ruling from the Accountingand Auditing Organisation for Islamic Financial Institutions (AAOFI) thatquestioned the sharia compliance of some sukuk structures also acted as abreak on issuance in 2008.

Sukuk issuance rose from the low point of Q4 2008 to reach $6bn in eachof Q3 & Q4 2009, resulting in an annual total of $20bn, up by 30% on 2008.Most issuers in 2009 have been government or quasi governmentorganisations. Uncertainty has arisen from the financing problems at DubaiWorld, resolved for the time being by a $10bn loan fromAbu Dhabi. This hasbrought concerns about settlement of sukuk defaults into focus with keyissues set out in the side panel. In the meantime, quality issuers of sukuk arecontinuing to attract demand from both Islamic and non-traditional investors.

Malaysia is the main country in the global market, but Indonesia andSingapore have come into the market more strongly in 2009. According toIslamic Financial Information Service (IFIS), the main factors hinderingrevival of the sukuk market in the GCC are troubled Kuwaiti investmentcompanies, the real estate market in the UAE and the availability of credit inSaudi Arabia.. There was one sukuk listing in Nasdaq Dubai and two on theLondon Stock Exchange in 2009. This has brought the Dubai total atend-2009 to 21 listings totalling $18bn and to 20 listings in London worth$11bn.

Long term prospects for sukuk are positive, with three factors having a rolein fostering growth in demand when market conditions improve:

- There is a commitment to a substantial programme of infrastructureinvestment in the GCC totalling up to $1,000bn over the next ten years,some of which will be financed through Sukuk.
- Recent years have shown that there is an appetite and demand forinvestment in Sukuk that goes well beyond Islamic investors amongstthose investors that wish to gain exposure to diverse but high qualityassets.
- Governments and regulators in a variety of countries have recognised theimportant role that Sukuk can play in capital markets and have beengiving priority to developing their countries as Sukuk centres. Inaddition to Dubai and the UK, these include Bahrain, Hong Kong,Malaysia, Japan, Pakistan, Singapore and South Korea.

Islamic funds The market for Islamic funds has been expanding steadily.Eurekahedge estimates that the total number of sharia compliant fundsreached 680 funds by end-2008 having risen more than threefold from around200 in 2003. Ernst & Young estimates that the total value of these funds has grown from $20bn in 2003 to $44bn in 2008 (Chart 4). Equity funds accountfor the largest segment: 40% of funds, with fixed income 16% and real estate& private equity 13% (Chart 5). Cash, commodities and other funds make upthe balance. Over half of funds, 58%, are invested in a portfolio covering theMiddle East and Africa. A further 20% are in a global portfolio, 15% in Asia,6% in America and the residual 1% elsewhere.

The bulk of Islamic funds are small scale with two thirds being less than$100m and many of these having attracted only $10m to $15m. The domicileof funds is heavily concentrated with nearly two thirds of the total number offunds being in five jurisdictions: Malaysia 23%. Saudi Arabia 19%, Kuwait9%, Luxembourg 7% and Bahrain 6%. Cayman, Ireland and Indonesia eachaccount for a further 3-4% each, but the remaining 25% is divided between afurther 23 countries, including 1% in the UK.

Eurekahedge estimates that the average return on Islamic equity funds was22% in 2009, recovering from an average drop of 28% in 2008. This wasclose to the return on the global equity index, up 25% in 2009 following a fallof 37% in 2008. The largest Islamic equity funds, according to Failaka, arethe US-based Amana Funds, which it estimates account for 95% of Islamicfunds in the US totalling $2.3bn in 2009.

There has been a substantial decline globally in the number of new fundlaunches since the 2007 peak. In the UK new offerings in 2009 haveincluded:

- BLME launching a sharia compliant money market fund, the first of itstype to be launched in Europe.- Qatar Islamic Bank
- European Finance House launching its GlobalSukuk Plus Fund.G
- atehouse Bank and DDCAP announced the launch of a fund in early2010 to invest capital in structured trade finance transactions. DDCAP isa wholesale Islamic market intermediary company.

This followed a more active year in 2008 when four exchange traded funds(ETFs) were listed on the London Stock Exchange. Other offerings in 2008included a fund of equity funds, the first of its type globally by SEI; the firstsharia compliant retail capital-protected equity fund in the UK by Alburaq;and the launch by FTSE Group of the FTSE Bursa Malaysia Hijrah ShariaIndex, in association with Bursa Malaysia.

Takaful, similar to mutual insurance, is a risk sharing entity that allows forthe transparent sharing of risk by pooling individual contributions for thebenefit of all subscribers. The global market remains at an early stage ofdevelopment and is estimated at $8.3bn in 2008, up from $6.6bn in 2007(Chart 6). Iran, where takaful is the compulsory form of insurance, is thelargest market, with assets totalling $2.6bn (Table 1). It is followed byMalaysia, with premiums of $2.1bn, UAE $1.0bn and Saudi Arabia $0.8bn.Together, these four countries account for over three quarters of the globalmarket. Smaller markets for takaful with annual premiums of over $100mhave developed in Kuwait, Bahrain, Qatar, Sudan and Indonesia. Penetrationof takaful is nevertheless low in these and other countries with Islamicmajorities. Takaful represents a strong growth opportunity, particularly withregard to life insurance, as sharia compliant products are developed.

The takaful market in the UK remains at an early stage of development.Principle Insurance, authorised by the FSA in 2008, was the first shariacompliant independent takaful company in the UK, but it stopped taking newbusiness in 2009. The remaining takaful available in the UK is restricted toHSBC Amanah’s home insurance offering. Prudential was given approval in2006 to launch a takaful business in Malaysia in partnership with BankNegara Malaysia.

Other financial products The range of products generated by Islamic financehas broadened steadily. In the UK in 2007 Merrill Lynch structured the firstsharia compliant credit default swap for a UK power company involvingGCC investors. In 2008, Barclays Capital and Sharia Capital Inc. of the USlaunched the first Islamic fund of hedge funds. Sharia compliant publicprivate partnerships (PPP) are also under consideration.

The UK has a successful record as a trading centre for Islamic products ascommodity-based LME contracts are traded off exchange. This has been akey mechanism for Islamic financial institutions to manage their assets andliabilities. In 2008 ETF Securities launched a sharia compliant precious metalexchange trade commodity platform, based on platinum, palladiumsilver, gold and a basket of other metals.

Law firms The UK is a major global provider of the specialist legalexpertise required for Islamic finance, with 20 major law firms providinglegal services in Islamic finance (Table 5).

Professional service firms The Big Four professional services firms -PricewaterhouseCoopers, KPMG, Ernst & Young and Deloitte - have eachestablished an Islamic finance team in London providing specialist servicesincluding advice on tax, listings, transactions, regulatory compliance,management, operations and IT systems.

Education and training There is a growing demand for skills as Islamicfinance expands and UK institutions are at the forefront of providingqualifications for the global industry.

Courses in Islamic finance are offered by the Chartered Institute forSecurities and Investment (CISI), Chartered Institute of ManagementAccountants, Association of International Accountants, Cass BusinessSchool and the Institute of Islamic Banking and Insurance. These courseshave been key to the development of Islamic finance qualifications in theUK. One new development in January 2010 has been the launch by AstonBusiness School of an Islamic Finance and Business Centre.

In a separate initiative, the Islamic Finance Council UK has developed apioneering ‘Scholar Professional Development Programme’ in conjunctionwith the CISI. The objective of the course is to teach conventional finance toShariah scholars worldwide. Partners for this programme include the CentralBank of Bahrain and the International Shariah ResearchAcademy for IslamicFinance (ISRA) that is backed by Malaysia’s Central Bank.

Beyond Islamic finance, the UK education offering that majors in Islamspans the full range of qualifications starting from 16 year-old school levelthrough vocational and career-based qualifications as well as undergraduateand postgraduate degrees.

London has been providing Islamic financial services for 30 years, althoughit is only in recent years that this service has begun to receive greater profile.An important feature of the development of London and the UK as the keyWestern centre for Islamic finance has been supportive government policiesintended to broaden the market for Islamic products for both shariacompliant institutions and firms with ‘Islamic windows’ (see side panel).

A key aspect of supportive government policy has been the establishmentsince 2003 of an enabling fiscal and regulatory framework in the UK forIslamic finance. There have been a number of initiatives which are intendedto form part of a continuing process:

The removal in 2003 of double tax on Islamic mortgages and theextension of tax relief on Islamic mortgages to companies, as well asindividuals.- Reform of arrangements for issues of bonds so that returns and incomepayments can be treated ‘as if’ interest. This makes London a moreattractive location for issuing and trading Sukuk.- Initiatives by the Financial Service Authority to ensure that regulatorytreatment of Islamic finance is consistent with its statutory objectivesand principles.

Following a review into the case for issuing sharia compliant governmentbonds, the UK Government announced in November 2008 that this would notoffer value for money at the present time. The situation has since been keptunder review by the Government. Investors would welcome a UKGovernment sukuk as it would provide more liquidity in the secondarymarket and act as a benchmark for UK companies that might considerissuing sukuk.

During 2009 the UK Government has been following through on otherinitiatives designed to support the UK as a centre for global finance and toensure conventional and alternative finance are treated on the same basis.Specifically, it has been undertaking a consultation on the legislativeframework for those alternative finance investment bonds (AFIBs) or sukukthat are structured to have similar economic characteristics to conventionaldebt instruments. Following this consultation, the Government announced on21 January 2010 that it intends to introduce measures to provide ‘clarity onthe regulatory treatment of corporate sukuk, reducing the legal costs for thesetypes of investments and removing unnecessary obstacles to their issuance’.


The global development of Islamic finance requires that further progress ismade in addressing a number of barriers. These may be broadly groupedwithin the following headings including: taxation and regulation;standardisation; awareness; and skills. More details on these barriers aredetailed in the The December 2008 UK Government paper on ‘Thedevelopment of Islamic finance in the UK: the Government’s perspective’.

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