Issue #8 summary

Demystifying Islamic investing
The underlying commercial reality of real estate investment selection applies as much to Islamic investing and financing as it does to its conventional counterpart, writes Rachel Tan. The differences lie in the methods used to make the transactions acceptable to Islamic investors
Islamic investments in European property continue to grow, reaching nearly €2.5 billion in 2005, up from €2 billion in 2004. Investors are attracted to the low cost of debt and the quality of stock in key European markets, which still offer positive margins between rental yields and financing costs in major markets. Markets are well regulated and relatively stable, and are expected to remain so over the near to medium term.
While the ordinary perception remains that Islamic real estate investors must grapple with a labyrinth of prohibitions that govern their investment criteria and financing options, the fact is that they are as sophisticated and financially driven as their conventional counterparts. Ethical investing by no means suppresses the economic and business objective of achieving target returns.
Therefore, Islamic investors evaluate each transaction on its economic merits to eliminate quickly commercially unviable opportunities before spending further time assessing Shariah principles and whether to reject a real estate opportunity. The muqasid or objective of the transaction is clearly profit, although the operative principle governing the investment remains compliance with the ethical code prescribed by Islamic law.
Investment opportunities are primarily screened for potential returns—whether income or capital growth. If the numbers do not achieve a particular hurdle rate, then the transaction is rejected by the Islamic investor before assessing whether it abides by Shariah principles.

On the verge of a boom
Shariah-compliant private equity is expected to supply the next boom, writes Majid Dawood
For some time we have heard and evidenced the growth of Islamic finance as an alternative banking product class and how it has become more mainstream. The numbers quoted in percentile terms of the growth over the past three decades, the annual growth rate, the amounts under management and the overall size of this growing market are obvious from the media coverage. The role played by the Islamic Development Bank (IDB) in the creation of multi-billion dollar market financial instruments has enabled the economic development of the Islamic ummah. The days of excitement by the development of the murabaha, musharika and ijara have been replaced by the emergence of the arboun and sukuk as the innovative counterparts to conventional options and bonds. However, the most dynamic development is that the products and applications are becoming uniform and the Shariah rules are being adopted across the wider market and jurisdictions.
Certain issues still remain and do vary from region to region and in some cases between Shariah scholars, but there is a lot more convergence, which is providing the impetus to the sector. Bankers are being innovative and are engaging the scholars to conduct the research that enables more exotic products to see the light of day.
The flavour of the moment is the real estate funds, as they lend themselves conveniently as an asset class under Shariah criteria. There are some good reasons for this. Primarily, post-9/11 investors are shying away from too much exposure to the US, and Europe is a maybe. Most of the investable capital is being poured back into “their own backyards”, meaning the GCC states.

In search of a common ground
The practice of Islamic banking varies worldwide. Professor Rodney Wilson discusses the differing national approaches and the legislation for accommodating Shariah-compliant financial instruments
T he Islamic banking industry has grown rapidly since the 1970s, reflecting the demand by pious Muslims to manage their finances in a way that avoids interest and complies with Islamic law. More than 30 per cent of bank assets in Saudi Arabia are now classified as Shariah compliant, the figures for other Gulf states ranging from 10 to 20 per cent, while in Malaysia around 10 per cent of bank assets are Islamic.
The last five years have witnessed the rapid growth of Islamic securities, known as sukuk, with more than US$6 billion issued in 2004, and major western banks such as Citigroup and HSBC involved in their management. At the retail level in the UK, the Islamic Bank of Britain was given regulatory approval in 2004 and opened its first branch on the Edgeware Road in London, and four further branches were opened in 2005.
The new methods of accepting deposits and providing financing without interest provide challenges for financial regulators, and there has been much debate about whether Islamic banks can be regulated in the same manner as conventional banks, or whether different criteria should be used. There is even debate about whether Islamic banks are actually banks, as their savings and investment accounts cannot be guaranteed and, therefore, arguably have some of the characteristics of investment companies.

Role change in state investment
Gulf states are encouraging more private investment in infrastructure, reports Adrian Creed
Increasingly, the Gulf states are moving away from their traditional role as decision maker, investor and producer of goods and services. The view of many governments in the region is that they should move into a supervisory role and encourage the private sector to participate in areas once reserved exclusively for the state.
The main sectors that have been liberalised and deregulated are power, water, ports, airports and telecoms. With the exception of upstream activities, there has been a move towards engaging private companies to participate in the traditionally closely guarded hydrocarbon sector. The private sector has been encouraged, in particular, to invest and participate in petrochemical and refining activity.
Privatisation has come about in many forms. In relation to ports, airports and most recently transmission and distribution of utilities, the use of management contracts and operating concessions has been popular.
In other cases, joint ventures between public and private sectors have been established, such as the joint venture between the state-owned Abu Dhabi National Hotels Company and Compass Group plc. On this transaction, a new company was formed by merging the operations of Compass Group Middle East with various divisions of ADNH to penetrate regional markets more effectively.
The management contract/joint venture approach allows the state to reap many of the perceived benefits of private sector efficiency and skill-sets. However, it does not tackle the problems of market distortion and increasing demands placed on state fiscal budgets. This benefit can normally be achieved only by some form of divestiture option, including pursuing policies such as direct or partial sales, public share offerings and permitting the private sector to implement new projects in sectors once exclusively reserved for the state.

Stepping up a gear in Jersey
Well-known as a major offshore finance centre, Jersey is harnessing its expertise to attract Islamic investors to a growing range of Shariah-compliant products, writes Phil Austin
Jersey has ambitious plans to establish itself as a major centre for Islamic finance, and work has already begun to turn these plans into reality. However, it would be wrong to seethis as a completely new direction for Jersey’s financial services industry. Jersey has been undertaking Islamic finance work for around 20 years, and it already has significant expertise.
Jersey works closely with the City of London, and it has been interesting to see how London has been raising its own profile as a key centre for Islamic finance, culminating in the licensing by the Financial Services Authority of the Islamic Bank of Britain in August 2004. We view these developments positively.
There are three elements of Jersey’s current, conventional offering which particularly lend themselves to Islamic finance: trusts, establishment and administration of funds, and corporate activity, including bonds and securitisations
Jersey has been a leader in the provision of trust services for several decades and, as such, it is used by clients from all over the world. A trust is a legal device recognised throughout common law countries, but it is a concept that is also very similar to the Islamic waqf. Indeed, some academics have suggested that the concept of a trust was brought back from the Middle East by the Crusaders.

Creating products and raising awareness
Lloyds TSB has joined the growing league of UK banks offering Shariah-compliant financial products. Paul Sherrin discusses how the bank is attempting to market them to British Muslims
Globally, Islamic banking finance industry assets have reached close to $300 billion in 2005 and the market has an estimated annual growth rate of more than 10 per cent, according to recent figures gathered by the Council for Islamic Banks.
With more than 270 Islamic financial institutions in more than 40 countries, it’s hard to believe that UK Muslims would struggle to find banking services that fit with their faith, but at the moment the market is mainly concentrated in Muslim countries of the Middle East, North Africa and South East Asia. The European market is relatively untapped.
This seems quite an oversight, as the Muslim community is one of the fastest growing in Britain today. There are around two million Muslims living in the UK and about 700,000 temporary visitors. Many are homeowners, and nearly all require bank accounts, but until recently, there were few financial service products that met their needs while complying with Islamic law.
Our initial research showed that more than three-quarters of British Muslims wanted banking services that fitted with their faith. This presented us with a great opportunity and a challenge we simply couldn’t turn down. In February 2005, Lloyds TSB became only the third British bank to launch a current account designed to comply with Shariah regulations following in the footsteps of HSBC and the Islamic Bank of Britain. The current account was followed in March with a home finance offer to help Britain’s Muslims purchase their own homes.