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Saturday, 21 July 2007

London eyes Islamic finance centre: the crown up for grabs

Lately, London has been getting publicity in terms of it becoming a rival Islamic financial centre to the likes of the GCC countries, Southeast Asia and Pakistan. New British prime minister Gordon Brown has said that he would like to see the City going out of its way to be a prominent Islamic finance centre. In the past few years, whether you look at the retail market or the wholesale market, the UK government has been very pro-active, especially in changing tax regulations to facilitate Islamic finance. It changed the sukuk rules this year in fact, to treat it as a bond rather than a leasing product. But is London really going to emerge as a threat to the GCC or South East Asian centres? "On the retail side I don't think we are competing with the GCC or even Southeast Asia," says Nigel Denison, director and head of markets of the newly-inaugurated Bank of London and the Middle East (BLME). "Because here it is so much focused on the client base in the UK and the local Muslim population, [and] is very much local." On sukuk, however, it may be different, with London already competing, although the markets may develop in tandem. "The interesting thing to watch will be the secondary trading in sukuk. Dubai, Bahrain and to a lesser extent Qatar all have their local businesses traded in their respective markets, which of course fragments liquidity and pricing capabilities. [Yet] it is difficult to see London completely taking over." With the big international banks coming onto the scene, they might actually have an advantage by not being Islamic. Denison explains: "because they just treat sukuk as a bond, they will short it, they will repo it, they will swap profits - in terms of hedging they have all the tools available." Capabilities: Many consider London has now even left behind New York as the global financial hub, with its own advantages of a solid infrastructure, a favourable tax regime, and the people and systems in place. There is no doubt the capabilities are there. And there is politics, too. The UK Government is keen to promote contact with the Islamic population. So, how much competition will it be for the Gulf? Participants like Denison recognise that the local players will still be based in the region, "so you can't really say it is going to be taking over in that sense". But possibly the secondary market may end up in London because it will be centralised that way. The trading desks are already in situ. As the world of Islamic finance evolves, it will be interesting to see who will ultimately take the crown. But the identity of that winner is probably still several years away. - (GN, 20 July 07)

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