London warms to Islamic finance
The land of Adam Smith now teems with a vibrant Islamic banking sector, with even non-Muslims being lured by the model's promise of transparency and stability.
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The 30-something driving instructor wants reliability, and believes Britain's growing Islamic finance sector offers this in a way that myriad traditional main street banks no longer do.
At a time of almost unprecedented financial volatility, Islamic banks are being hailed as bastions of stability. Growing numbers of individuals and companies are now embracing their workings, which are based on Koranic principles.
Using law changes and generous tax breaks, the British government is now attempting to transform London into the Western world's center for Islamic finance. Conventional banks and financial institutions are also rolling out a range of Islamic finance products.
Globally, the market for Islamic financial services is estimated to have grown more than threefold over the past decade – from around $150 billion in the mid-1990s to $500 billion in 2006.
Keen to tap into this, Britain's authorities are planning to become the first Western government to issue an Islamic bond – called a sukuk – structured to comply with the sharia law principles of Islamic finance, which forbids all forms of interest payments.
Sharia law also prohibits investing in any enterprises involved with alcohol, gambling, tobacco, and pornography – a fact that nicely dovetails with the growing number of Westerners seeking socially responsible investments.
According to a new study by International Financial Services London (IFSL), an independent organization representing Britain's financial services industry, Islamic finance will emerge largely unscathed from the current global crisis, largely because its structures make little or no use of many of the complicated instruments blamed for the current problems in conventional finance, such as derivatives and short-selling.
Although Islamic finance does allow for risk-taking, it does not permit excessive uncertainty, known as gharar. All deals to buy or sell are invalid if the object dealt with is not certain and transparent.
When risks are taken, the Islamic financial model insists they are shared. In retail, this involves the customer and their bank sharing the risk of any investment on agreed terms, and dividing any profits between them. Products revolve around principles such as murabaha, a form of credit enabling customers to make a purchase without having to take out an interest-bearing loan. The bank buys the item and then sells it on to the customer on a deferred basis.