When the British government said last month it would issue its first Islamic bond, the implications went far beyond the debt market: it was a signal that London will not back down in an escalating tussle among cities for Islamic financial business.
London has long been the default centre for international firms to
issue Shariah-compliant bonds, part of a fast-growing Islamic finance
sector that will be worth $2tn globally next year, according to
consultants Ernst and Young.
But it faces a mounting challenge from two centres: Dubai and Kuala Lumpur.
Dubai, at the heart of the wealthy Gulf, announced a push into
Islamic finance this year. It has an entrepreneurial culture which has
already made it the Middle East’s top conventional banking centre, and
big state-run firms which can be expected to support the government’s
The Malaysian capital has a reputation for efficient regulation of
Islamic finance and a huge domestic market for local-currency Islamic
bonds, which is now starting to attract foreign issuers.
The final result of the three cities’ rivalry may not be known for
years, but thousands of jobs and large amounts of direct investment in
companies and real estate are likely to depend on the outcome.
“You need a critical mass of borrowers and investors,” said Khalid
Howladar, senior credit officer at Moody’s Investors Service. “You have
multiple centres that are looking to establish their pre-eminence in the
Islamic banking, which obeys religious principles such as bans on
interest and pure monetary speculation, is still dwarfed by conventional
banking with over $100tn of assets.
But the top 20 Islamic banks have been growing 16% annually in the
last three years, far outpacing their conventional rivals, according to
Ernst and Young. That makes Islamic finance tempting for many non-Muslim
In an unstable global market environment, the conservatism of Islamic
financial structures may be helping the industry. Its access to big
pools of Islamic investment funds in the Gulf oil-producing states and
southeast Asia is certainly a factor.
Over the past year, the industry has been expanding from its
traditional bases in those two regions across many nations with
significant Muslim populations, from North Africa and Kazakhstan to
Nigeria and Djibouti. European financial firms have tapped Islamic funds
by issuing Sharia-compliant bonds, known as sukuk.
That promises big rewards for the financial centres which arrange
issues of sukuk and other Islamic products, employ the experts who
structure them, and host the scholars who vet them for religious
“The pent-up demand for short-term papers to manage liquidity in
Islamic finance is huge, and to meet this will require other market
players to come in,” Malaysia’s central bank governor Zeti Akhtar Aziz
Dubai laid claim to such business in January this year when its
ruler, Sheikh Mohamed bin Rashid al-Maktoum, announced a drive to
develop the emirate as an Islamic financial centre.
Its main competitors responded. In March, Britain launched a
publicity campaign involving government junior ministers and private
sector executives to burnish London’s Islamic credentials.
In May and June, Malaysia took steps to strengthen its regulation of
the industry while making it easier for its Islamic insurers to invest
their money overseas.
The most high-profile - and most cut-throat - area of competition
between the three centres is arranging sukuk. London has led in
attracting issues by big international companies because of the massive
size of its conventional financial markets and its globally respected
Malaysia, however, has the advantage of a vibrant market in
local-currency sukuk, thanks to a Muslim-majority population; Kuala
Lumpur has accounted for about two-thirds of all sukuk issued globally
this year. That is persuading some foreign firms, from as far afield as
Kazakhstan, to issue in Malaysia.
Dubai lists relatively few sukuk on its exchanges; traditionally its
state-owned companies have gone to London to issue. But a determined
campaign by Dubai’s government is now convincing its companies to issue
at home, and could attract business from firms in neighbouring Gulf
British Prime Minister David Cameron appeared to be trying to head
off that threat last month with his plan for Britain to become the first
Western country to issue a sovereign sukuk.
“The UK sukuk announcement has really helped to galvanise the
market,” said Farmida Bi, European head of Islamic finance at law firm
Norton Rose Fulbright in London, predicting the sovereign issue would
help to trigger corporate issues.
However, Dubai won a victory this month when the Jeddah-based Islamic
Development Bank, which has long operated sukuk issuance programmes in
London and Kuala Lumpur, said it would set up a $10bn programme on the
Nasdaq Dubai exchange.
“I do believe Dubai can reach a leadership position, although
progress has been slow and it will take a few years to reach the level
of Malaysia,” said Apostolos Bantis, emerging markets credit analyst at
Commerzbank in London.
Because London is not located within a natural pool of sukuk issuers
and European customers will remain a limited group, its position looks
weakest among the three centres from a long-term perspective, Bantis
Other areas of competition include Islamic insurance, known as
takaful, and asset management. Once again, London’s sheer size gives it
an advantage, while Kuala Lumpur benefits from its location in a vast,
predominantly Muslim area of southeast Asia.
British-based firm Cobalt struck a blow for London earlier this year
by developing a novel syndication model for takaful. The model offers
A-rated capacity which most carriers in the Gulf lack, said chief
executive Richard Bishop.
This could clash with Dubai’s plans to expand in takaful. Abdulaziz
al-Ghurair, head of the authority overseeing Dubai’s financial centre,
said last month that since there were only 19 Islamic re-insurance firms
globally, takaful firms were forced to transfer some of their risk to
That creates a window for Dubai to set up Islamic re-insurers, he said without detailing how this would be done.
Ultimately, much will depend on which financial centre can establish
“thought leadership” in Islamic business, creating standards and
structures which come to be accepted across regions and, ideally, across
the global industry.
Traditionally, Malaysia has been influential because of its
centralised model of regulation, which minimises disputes among
different boards of Islamic scholars. But some Gulf scholars view
Malaysian regulation as too liberal, arguing that it permits structures
which too closely mimic conventional finance.
Dubai has a chance to chart a path between these two camps; it has
said that after consulting the industry, it will issue sukuk standards
that are more detailed and comprehensive than others, hopefully
resolving conflicts between the regions.
“This is very important. We think it’s a basic requirement but it
doesn’t exist as we speak. But this will not come from the sharia
scholars - it has to come from the industry,” said Hamed Buamim,
director-general of the Dubai Chamber of Commerce & Industry, which
is promoting the emirate’s Islamic push. – Reuters