First French Forum on Islamic Finance How to facilitate Islamic Finance: lessons learnt from experience in the Middle East and the UK 6 December 2007

2 Islamic Finance in the Middle East: Why is Islamic Finance currently en vogue Growth in the Middle East  Islamically compliant assets estimated at US$500billion  Double digit growth year on year Large pool of liquid funds looking for investments that accord with religious beliefs  Liquid funds estimated at US$80billion Pressures on margins in traditional markets Islamic finance is a credible alternative – deals done in past 5 years Socio-Political dimension Right deal, right place, right time…

3 What is Shari’ah ? Shari’ah has two principal sources:  The Qur’an – the sacred book that records the word of God as revealed to the Prophet Muhammed (PBUH)  The Hadith – the body of documents that record the Sunnah (the practice of “life-example”) of the Prophet (PBUH) Four schools of Shari’ah jurisprudence: Hanafi, Malaki, Shafi’i and Hanbali Jurists undertake process of Iftihad with aim to achieve Ijma

4 Islamic Finance in the Middle East: The Infrastructure Islamic Standard Setters:  Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI)  Islamic Financial Services Board (ISFB)  International Islamic Financial Market (IIFM)  Development Organisations: IDB; LMC Development of Shari’ah knowledge:  FIQH Academy  Shari’ah Supervisory Boards Issuance of holistic banking licences:  Dedicated units/ funds  Dedicated indices/ sources: Dow Jones Index Development of the human resource

5 Islamic Finance in the UK : overview London now seen as an increasingly important global centre for Islamic Finance. The main reasons are:  Global expansion of Islamic finance (more than 300 financial institutions offering Islamic products)  Markets and skills base: strength of the UK financial services industry with proven track record of developing and delivering new products  English law already the preferred legal jurisdiction for many Islamic finance transactions - High Court legal case of Shamil Bank of Bahrain EC vs. Beximco Pharmaceuticals et al (2004)  Islamic windows: new business lines established by major international financial institutions  Public policy and taxation: Islamic products now on the same tax footing as their conventional counterparts - most recently, the Finance Act 2007 clarified the tax framework in the case of Sukuk  Single financial regulator (FSA)

6 Islamic Finance in the UK : the current position To date, three wholly Islamic banks authorised by the FSA: Islamic Bank of Britain (2004); the European Islamic Investment Bank (2006) and The Bank of London and the Middle East (2007). Other applications in the pipeline. FSA also authorised one Islamic hedge fund manager and considering application from the first wholly Islamic Takaful provider Application process under Part IV of the Financial Services and Markets Act 2000 (FSMA) Three main areas of potential difficulty in applying FSMA to Islamic firms:  Regulatory definition of products  The role of Shari’ah scholars  Financial promotions

7 Islamic Finance in the UK: the challenges Some products and services may be approved as being Shari’ah -compliant by some Shari’ah scholars but not by others In the UK, the FSA supports trends towards common Shari’ah standards by organisations such as the IFSB and the AAOIFI Shari’ah compliance throughout the product life cycle: dealing with Shari’ah defences – choice of law, definitions, representations, waivers Issues for Shari’ah scholars – role of the Shari’ah Supervisory Board (SSB): executive role or simply advisory. Interaction with the FSA which is a secular and not religious regulator

8 Islamic Finance in the UK: the challenges Contracts and documentation risk:  In contracts for Islamic transactions, the enforceability of terms and conditions depends on the governing law  In the case of a dispute, a UK court is unlikely to give a verdict based on Shari’ah law (Beximco)  Contracts have to be written very carefully to minimise potential disputes and state the governing law  Most Islamic contracts are governed by English law and a few under New York law  Advantages of standardisation of documentation

9 Islamic finance: future prospects Islamic Project Finance Structural innovation Increasing popularity in historically “difficult” markets Award-winning deals Capital Markets Convertible Sukuk: PCFC, Nakheel, Aldar Multiple Sukuk options:  Murabaha  Istisna’a  Musharaka  Ijara and Ijara mawsufah fi al dhimmah Tradeable Sukuk and development of secondary market: global listings Islamic securitisation  Shari’ah compliant asset portfolios  Not just an Islamic concern

10 Islamic finance: future prospects Structured Finance Hedging and derivative-type products (profit rate swaps and forex products) Treasury products Takaful and re-takaful Islamic Corporate Finance Private equity Islamic investment funds Growth Global listings of Islamic capital markets products – London positioning itself as a “centre” of Islamic finance Islamic retail banking Non Islamic parties to Shari’ah compliant transactions / ethical financing Standardisation and centralisation

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