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he sub-prime crisis raging throughout the developed and developing world as of yet shows no sign
of abating. This crisis provoked a fearful flight from
the more boutique asset classes, such as the highly collateralized debt obligations that precipitated the financial
storm. While Islamic financial instruments currently make
up a small proportion of global finance, they actually
experienced an annual 15% growth from 2005 to 2008
(Fig. 1), with the energy-producing Gulf nations in the
Middle East responsible for much of the increase.
Several factors spm tlus intensification: the escape i'om
tl1e more esoteric highly-leveraged financial assets, and
tl1e rise in per-capita wealth of the Gulf and Asian IslanLic
nations. The spectacular growth by many of the Gulf
Cooperative Council (GCC) nations promoted tl1e suleulz,
the IslanLic bonds that have been the fastest-growing element of the IslanLic financial market. The highly coveted
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london becomes
Islamic banking hub
slamic banking is growing in popularity - not
only in Muslim nati ons but in Europe as w ell ,
part icularly in the Un ited Kingdom . London,
which has become a hub of Islamic banking
outside the Middl e East, is now home to 25 companies offering some form of Isl am ic finan cing,
accord ing to US News and World Report.
The larg est of these instit utio ns is the Bank
of London and the Middle East, or BLME, whi ch
strictly follows sharia law rather than conventional
Western banking practi ces. Sharia-compliant ba nking calls for alternative structuring of loans and
f inancing since th e centuries-old relig ious laws
forbid bank interest and trading and debt.
Kuwaiti-owned BLME is the largest of five whol ly sharia-compliant banks operating in Britain . The
first, th e Islam ic Bank of Brit ain, opened in 2004,
and th e number is expected to double w ithin five
years. Some conventional banks are even offering
sharia-compliant products.
One issue is a lack of standardization. Religious scholars are typically put on the boards of
directors of the banks, and definitions of what
are acceptable banking practices can va ry from
region to region and from bank to bank. Malaysian
banks t end to offer more fl exible interpretations of
sharia-compli ant products than do their cons ervative counterparts in the Gulf, so there is often a
lack of uniformity in ban ki ng practices.
The UK has become a foca l point of Islamic
banking in th e West because of its hist oric links to
th e M iddle East and because of its strong financial
talent pool. Th e Lond on Stock Exchange began
listing sukuks, a type of Islamic bond backed by
ownersh ip of a tang ible asset th at produ ces a
financial return, this year, and 18 are now t rading
on the excha nge.
Globally, th e Islamic banking sector total assets
are estimat ed at between $500 billion and $1 tril lion and growth is between 10% and 15% annually.
Isla m ic ban ks have avoided the sub-prime
fiasco , according to an executive w ith BLME, who
adds that there are no problems w ith big writeoffs, as is th e case with most Western banks, and
th ere is still ample liquid ity.
26
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"Even American energy firms are incorporating
c?n?'olling legal jurisfinancing large-scale oil
.
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dicuon becomes conand gas infrasu'ucture
Shan'ah-based fmanclal mstruments. The Texastested, Due to the lack
based oil group, East Cameron Partners, sold a
of clal'ity in bankruptcy
projects, The development of First Energy
$166 million sukuk In July 2006, which is actually proceedings, Moody's
bwle also heralds dle
the first Islamic securitization of note in the US."
talees a somewhat congradual shift away from
troversial view dlat such
Islamic 10allS al'e unsecured,
Western financial institutions funding GCC oil and gas
projects, to local ba!1les talcing up dle slack, particularly in
However, Saudi King Abdullah's $400 billion energy
the tight credit mal'ket,
stimulus plall, designed to pre-empt possible Saudi ecoAnother reason for the glaling absence is the void of legal nomic stagnation resulting from the global credit crunch,
regulation and standardization in this sector, While Saudi
will almost certainly use Islamic financial instruments,
, Western energy companies, once shy about unorthoArabia is an exception due in lal'ge measure to its 2006
Capital Markets Law, most GCC COUllU'ies lack specialized
dox financing options, now embraced suhuh issuances,
suhtle laws alld laws relating to special purpose vehicles
Moreover, Dana Gas, which issued a convertible mkuh on
used in suleuh SU'uctures, Many final1Cial bodies stayed away Oct, 4, 2007, experienced such a strong market response,
.... . . ...
28
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Gulf energy projects, a large offering by a highly-regarded modernize and expand power transmission and dist:ribuGee government (Saudi Arabia is the preferred country) tion networks.
would add credibility to the market and serve as a benchWidl a virtual credit fi'eeze in dle West, it is Weely that the
mark for future investment potential.
Gee governments will turn to dle regional Islamic finance
Gee governments want to get involved, from concern market to develop dle sector. But as the sophistication of
Islamic financial products increases, investors fi'om Islanuc
that the meteoric growth of the subtlz usage may lead to
nations will increasingly migrate to Islamic finance, and
lapses in Shari'ah compliance and corporate governance,
eschew the conventional financial instruments for developespecially in a region which is as under-regulated as the
ment ofdleir megabillion-dollar energy projects.
Gulf finance sector. The Gee nations have need furthermore of a multibillion-dollar power sector overhaul. The
At the same time it must be noted, Islamic financial
Gulf countries are going to need to secure billions of dol- instruments are not a jealous suitor. As many energy
lars in energy investment over the next few years in order compatues have demonstrated, traditional finance is
always available for diversification purposes. om::J
to meet their gargantuan energy needs (Fig. 2) .
Power shortages have already been experienced in
About the author
Saudi Arabia and Kuwait, widl more expected to corne.
The crux of dle power problem is twofold: the demoJustin Da1-;gin is a 1'eseanh fellow at the Dubai
graphic increase which put a strain on local utilities and
InitiatiFe - HarFat'd UniFenity, when he
dle below-market pricing for gas destined to the domestic 1'eseanhes ene-tlf), polic), in the Persian Gulf
market. These two factors combined have put dle major1'egion. He specializes in carbon trading, oil
ity of the Gulf countries in an unenviable position.
and gas production in the Gulf, and the legal
According to a Moody's Investment Services report
jramcwor/z surrounding the Gulf ene1-;g), sector:
During hisgraduate legal studies, he interned
on the Arabian Gulf electricity industry published on
Oct. 7,2008, the Gee will need as much as $50 billion
in the legal department at OPEC. Da1lfin was
by 2015 to boost total power generating capacity by 60
also a reseanh fellow at the Oxford Institute for Enetlf), Studies
gigawatts in order to keep pace widl demand groWdl.
and is lPm-'/Zing on his second boolz related to the ene'l'lf)' sectm-:
Further extensive investments will also be required to
He is fluent in Spanish, English, and A1'abic.
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