London’s Move into Islamic Finance

            The British Treasury recently announced plans to issue an Islamic bond, or sukuk, worth around 220 million pounds early next year. The U.K. will be the first non-Islamic country to issue a sukuk. This unusual move allows the U.K. to access capital rich Islamic markets such as Saudi Arabia, UAE, and Qatar. Under Sharia Law no interest can be charged on business dealings, and the bonds cannot involve firms that deal in “illegal activities” such as gambling or alcohol.
            The move comes as London hopes to attract greater financial activity, and hopes to become a center of Islamic finance, similar to Dubai. While Islamic finance only accounts for around one percent of global assets today, the field is growing 50% faster than traditional banking assets. The total amount of Islamic assets is expected to exceed $1.8 trillion by 2018, with much being held by non-Muslims.
            The concept of Islamic finance forces bonds to be secured, and tied to revenue producing assets. This ensures that risks such as the unsecured credit that fueled the previous crisis are mitigated. A side effect of London’s move may be that it reduces the risk of future default. By participating in Islamic finance the U.K.’s sovereign debt becomes less risky and so may be a model for other nations, as they look to avoid future financial crises.

- Ashish Sathe