Issue #5 summary

Sukuk breathes new life into federal state
Since the end of the 1990s, sukuks have been the way for “synthetic” bonds that combine the wisdom of Islam with the technology of financial engineering. The result is, basically, securitised real estate similar to asset-backed securities noted like a standard debt on the exchange to be sold and bought with full liquidity and safety.
The buyer of these papers does not receive interest. The cashflow consists of rent. As well, the full application of this concept leads to a limit of borrowing, which cannot exceed the existing wealth. This is unlike the conventional concept—backed by tax income streams rather than real estate.
The restrictions of Islam prevent states and people alike from taking debts for paying rates, rents or wages, and granting ease for those in difficulties. A vicious circle of debt is stopped.
The sukuk market has grown steadily. Many Islamic finance experts see the sukuk as a hot topic with a long sell-by date. Yet, it was truly unexpected to hear Saxony–Anhalt, a federal German state, become the first issuer of an Islamic bond in Europe. The financial capital of London, active in Islamic finance, was much more likely and prepared.
Why is Germany moving so quickly? In 2001 the federal German state of Saxony-Anhalt sold f50m of a conventional bond to Arab investors. During discussions, it was proposed that an Islamic financial structure be used, and it was agreed to proceed.
The benefits were identified. A broader source for investors of the bonds would be created, which, over the long term, should reduce the financing costs and make Saxony-Anhalt a desired place for foreign investors. The investors would be welcomed and invited to build up companies in an area between Hanover, which hosts the largest computer fair, and Berlin, the German capital.
On further analysis, it became evident to the finance ministry that a proper structuring was needed. To avoid any taxes, which would not apply to a conventional structure, a solution was found in a Dutch foundation, which also speeded up the construction of the sukuk. Foundations are a legal form fully accepted in classical Islamic law as waqf.
But what about the underlying assets— Muslims cannot trade in money or debts. Germany’s ministry of finance transferred the usufruct of their buildings to the Dutch foundation, which issues the sukuk and pays rent for the use.


Europe is where the action is
Property has always been a favourite investment class of Islamic investors. DTZ has tracked Middle Eastern investment activity into European real estate from 1997 to the present day, during which time a total of £10 billion has been invested, over 50% of which has been Islamic. From a 3% share in 1997, Islamic investments now constitute over 25% of total cross-border investments into European property. Most of this capital has been invested into property in the UK, France and the Benelux.
As recently as five years ago, most of the property transactions in the UK and France were single building acquisitions in specific real estate sectors (mostly prime offices, hotels and residential buildings). Islamic investors have realised that the accumulation of direct investments into a large portfolio may not be the best way of maximising the return on their investments.
First, there is the issue of timing of purchase: relying purely on brokerage advice, unhinged from a solid investment strategy, does not necessarily enable the investor to exploit the best pricing opportunities in the market. Second, asset management issues during the holding period of the assets can become somewhat problematic for investors, most of whom are purely financial investors with no real estate expertise.
The authorisation process was a long and challenging task, but the fact that solutions to problems were found reflects, in my view, a regulator who works with the market and within permissible boundaries is prepared to be flexible.
We would not have reached the point of authorisation without the advice, guidance and support of the Shariah scholars, who form the bank’s Shariah supervisory
committee. These distinguished gentlemen skilfully guided us through the whole process, providing direction which enabled us to resolve certain issues previously being seen as irreconcilable differences between conventional and Islamic banking. But at
the same time they ensured that our approval remained compliant with the Islamic faith.

Business is already booming
In recent years there have been clear messages coming from politicians and others of the need for the UK to progress more rapidly with policies achieving greater social inclusiveness within society. One such message came within a speech from the former chairman and chief executive of the FSA, Sir Howard Davies, when he addressed the Bahrain Monetary Agency in 2002. Sir Howard said that, while accommodating Islamic banking within the western regulatory framework presented many hurdles, the UK regulator would nonetheless be prepared to consider an application.
It was against this backdrop that a group of prominent bankers based in the Gulf began an examination of the potential for introducing Islamic retail banking into the UK, and in July 2002 the Islamic House of Britain was formed as a UK company with the objective of bringing the concept of Islamic retail banking into reality.
Initial discussions with the FSA were constructive and sufficiently encouraging for business plans to be developed. In 2003, detailed submissions and discussions commenced with the FSA. At the outset a number of difficulties were identified, not least the status of Islamic savings accounts where the structure of these products does not fit within the legal definition of a UK banking deposit.
The authorisation process was a long and challenging task, but the fact that solutions to problems were found reflects, in my view, a regulator who works with the market and within permissible boundaries is prepared to be flexible.
We would not have reached the point of authorisation without the advice, guidance and support of the Shariah scholars, who form the bank’s Shariah supervisory
committee. These distinguished gentlemen skilfully guided us through the whole process, providing direction which enabled us to resolve certain issues previously being seen as irreconcilable differences between conventional and Islamic banking. But at
the same time they ensured that our approval remained compliant with the Islamic faith.
On 6 August 2004, the FSA authorised the Islamic House of Britain as the UK’s very first Shariah-compliant retail bank—in fact the very first Islamic bank to be authorised in the whole of western Europe. The authorisation is not only good news for British Muslims but also for UK Plc, which now leads the western world in what is a growing and increasingly more important area of economic activity.

Chronicling the rise of interest
Lending and borrowing between humans has taken place since time immemorial. People borrowed and returned implements, animals and foodstuff from their friends, neighbours and relations. They returned the same after use or, in the case of foodstuff, consumed and returned the equivalent when they came into possession of similar stuff. When money came into being, people borrowed that too and returned it. It was all on the basis of mutual help: the borrower today may be the lender tomorrow and vice versa.
As time progressed, professional money lenders appeared on the scene, and they demanded a fee for the use of their money. This fee is now called interest, but until a few centuries ago it was called usury. In Islam, interest or usury, which in Arabic is called riba, is prohibited. Demanding, receiving, paying, witnessing and anything connected with these activities are all equally prohibited. There is no controversy over this. Similar prohibitions exist also in the religious laws of Judaism and Christianity. Although other religions may not have written laws explicitly prohibiting usury, their followers do eschew the practice of usury.
In earlier times, lending and borrowing was mainly between individuals, and what was meant by usury in these transactions was commonly known and understood. In money matters, any amount over and above the lent sum was defined as usury or riba.
The ill consequences of usurious lending—the ruination of individuals and families—were witnessed at the local level and therefore the community held the practitioners in contempt. But the need for capital and loans existed and, in the absence of alternatives, lenders became an indispensable component of the society. They also exercised invisible power over their clients’ resources. If clients happened to be in authority, the power extended to other areas as well.
Kings and nobles needed money to wage war or to live extravagantly. Money lenders were happy to oblige, not only for the profit it brought them but also for the privileges and concessions they could extract from their royal clients. Mining concessions, special trading licenses, tax exemptions, lucrative contracts for public projects, land grants, and personal privileges such as royal titles and appointments to influential positions are just a few examples. These dealings were carried out discretely and the public was generally ignorant of them. But the citizens paid the price, one way or another.