Islamic Finance Could Boost Stalled Schemes

The UK's rapidly-growing Islamic finance sector could provide a much-needed source of investment for stalled investment projects such as regeneration and housing schemes, according to one Manchester-based expert.

Dawood Ahmedji, who is a director of Deloitte's European Islamic finance unit, said bodies such as the Northwest Regional Development Agency could tap into an estimated $700 billion market by creating sukuks, or Islamic bonds, which comply with the principles of sharia law.

He argues that regeneration, social housebuilding or PFI (private finance initiative) projects which offer returns on tangible assets would make for good investments for funds held by Middle Eastern financial institutions which need to expand beyond their own territories if they are to maintain recent levels of growth.

Moreover, as UK banks have seemed less willing (or able) to fund such infrastructure projects in recent months it would make sense for regeneration agencies to seek out what he describes as “a useful source of liquidity”. “Investments would have to be attractive and offer a commensurate rate of return but structured in a sharia-compliant way,” he said.

Deloitte set up its Islamic finance unit in a bid to capitalise on what it sees as an opportunity to sell specialist expertise to financial firms across Europe. He has recently advised a Qatar-based investment bank and a Saudi firm looking to create an Islamic insurance product for the UK market. HSBC was one of the first UK banks to launch Islamic financial products in the UK through its Amanah division eight years ago. However, it remained a fairly niche offering until the Government reformed rules which penalised holders of sharia mortgages by imposing double stamp duty on them.

It was followed by the independent Birmingham-based Islamic Bank of Britain, which has seen the amount of customer deposits it holds increase to £158m in just four years. Lloyds TSB is the other major player in the sector, which launched its first sharia-compliant bank accounts in 2006 and business accounts a year later.

Atiyah Zafar, a Manchester-based associate of HSBC Private Bank's Global South Asian Diaspora (GSAD) team, said that in the early days investment products were also seen as unattractive as returns were typically 10 per cent lower than the industry average. However, she added this was no longer the case, and the fact sharia principles oblige banks and customers to share risks in transactions has meant assets haven't been hit by losses sustained through products which used large amounts of leveraged debt. “People realise it's a good offer,” she said, adding that non-Muslim clients have been enthused by its principles.

Dan Taylor, head of banking at accountancy firm BDO Stoy Hayward, said that the more conservative approach taken to risk by Islamic banks means they may step in to fill a funding gap.

“In light of the market turmoil, we could expect the number of stand alone Islamic financial institutions present in the UK to double over the next three years,” he said.

There are currently about 20 banks offering Islamic products in the UK, many of which are in London. Bahrain-based Arab Banking Corporation recently announced its intention to join the sector, targeting the wholesale funding markets.

Ahmedji believes that there are opportunities to grow the sector throughout the UK by building an Islamic finance offer in Britain that will serve the wider European market. Although the UK's Muslim population is growing, it currently only stands at around 1.8m, compared with 6m in France and around 3m in Germany.

Some of the growth in Manchester could come through firms advising the private equity industry. Although sharia-compliant products generally avoid investments which carry much debt, Ahmedji's team has held discussions both with private equity firms and Real Estate Investment Trusts on sharia-compliant structures.

Bashir Timol, of Bolton-based 1st Ethical Ltd, said that the firm he co-founded with Sufyan Ismail in 2001 to provide advice to clients on sharia-compliant financial products, has now diversified into corporate finance and risk capital. It has begun sharing the risk in such deals by taking small stakes in companies instead of fees. This hasn't done wonders for the firm's income — the most recent filed accounts for the year ending November 30, 2007, show a 57 per cent drop in sales to £855,968 (2006: £2m) and a decline in pre-tax profits to just £12,267 (£150,118).

However, Timol said another company he owns with Ismail, One E Tax Ltd, which provides tax advisory services to high net worth individuals, made a £263,000 pre-tax profit on sales of more than £5.7m in the same period.

“We've built shareholdings in a number of companies and taken a long-term view,” he said. “But we are becoming a pretty niche player — we only deal with high net-worth individuals and entrepreneurs, and a lot of what we do is on an invitation basis.”

From Crain's Manchester Business