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Monday, 27 August 2007

Islamic finance: from niche to mainstream

Islamic finance has moved from niche to mainstream in Europe with western banks and institutions increasingly recognising Islamic instruments as viable financing options. Within Europe, both the UK and Switzerland have become world centres for the development of Islamic finance in a global market conservatively estimated to be worth upward of half a trillion dollars. Islam is Europe's fastest growing religion with many countries recording a rapid rise in their Muslim populations. In some, notably the UK, this has led to an increasing demand for Islamically structured financial products. But increasing European interest in Islamic asset classes is not confined to Muslims. There was, for example, a massive jump in Sukuk (Islamic bond) issuance in the first-half of 2007 as more and more conventional European banks and institutions invested. The structural innovations of Sukuks, their growth in non-Islamic jurisdictions, and Sukuk risk and liquidity management are just some of the issues that will come under the spotlight at the International Islamic Finance Forum Europe, which takes place at the World Trade Centre, Zurich, Switzerland, 29 October-1 November 2007. The Sukuk market grew by a massive 75% to US$85 billion in total outstanding issues in the first half of 2007. The US$24.5 billion of funds raised in the first half nearly surpassed the total amount of new issuance in 2006 of US$26.8 billion, according to the Islamic Finance Information Service, online media partner of the forum. The Bank of London and the Middle East, London's second biggest wholesale Islamic bank and one of the new Islamic financial houses taking part in the Zurich forum, said the growth of the Sukuk market is a result of greater knowledge about Islamic finance and readier acceptance in Europe of Sukuk as an investment vehicle. Western investors make up about 70-80% of the buyers of Sukuks issued in the Middle East, against 20-40% last year. This was dramatically highlighted by two of the biggest Sukuk issues of the year – a US$1.5 billion issue from Dubai Ports World which allocated 60% of its paper to western buyers and a US$2.53 billion deal from Aldar Properties, the Abu Dhabi developer, which saw western institutions buy 80% of the paper. The Sukuk market has attracted wide interest from European banks, insurance and pension funds in the belief that the strength of the Arabian Gulf economies, where many Sukuks are issued, provides good returns on the back of big oil earnings and huge infrastructure developments. “The Sukuk market has grown dramatically since the inauguration of the first International Islamic Finance Forum in Dubai in early 2002,” said conference manager Swati Taneja of forum organisers IIR Middle East. “The value of new issuance at that time stood at less than US$500 million compared with a projected total of about US$50 billion in 2007.” “Most analysts believe that, medium term, the Sukuk market will continue to grow even in a more volatile credit environment,” Taneja added. “Unlike conventional bonds, a Sukuk confers a proportional ownership of the underlying asset - as well as the income that it generates.” In the meantime, however, there has been no avoiding the short term fallout of global credit market turmoil. United Arab Emirates based Dana Gas postponed placing its US$1 billion Sukuk until September due to credit market weakness. Earlier, First Gulf Bank of the UAE and Bahrain's Ithmar Bank announced deferment of their issues. The International Islamic Finance Forum will also be exploring the expansion of Islamic finance in Europe; the pressing issue of Islamic finance and rating agencies; new strategies in wealth management and private banking; and sustainability in Islamic financial products. With more than 40 speakers, over 20 sessions and two interactive workshops the Europe forum maintains its importance as the Islamic finance industry’s premier networking event. The Zurich event takes place in association with Dow Jones Indexes and with International Turnkey Systems as platinum sponsor and Path Solutions as gold sponsor. - (AB, 26 Aug 07)

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