Making London the centre for Islamic Finance

Now the attempts to make London the centre for Islamic Finance is good. I like the attempt because it shows a proactive measure of regulation, some drive to keep on top of financial instruments, and a desire to experiment in finance. That's how London and the UK will keep on succeeding.

The Government wanted to raise some funds using Islamic Bonds (sukuk's, etc.) but as the FT reports, there is going to be a bit of a challenge because our laws are simply not capable of handling such kind of structures. And it would take much longer, and will be a bit tough to get subscribers as the coupon payments will be low.

We always knew that we will need to modify our laws, but I did not realise it will be this complex. You see, Islamic Bonds do not work on the basis of interest but on the basis of profit and loss of an underlying asset.

Nothing strange in this, we have quite a lot of such kind of structures already. Think about the PFI initiatives, or large infrastructure projects, etc. who get funded on this basis. So you raise 100 quid via a bond to make a bridge and promise to pay the bond holders out of the tolls you get. You securitise the toll payments and pay off the bond holders. The only difference that you will see is that instead of a fixed amount, you get (theoretically!!!) a cut of the profit or loss. But that's only in theory because people arent stupid, they can compare cashflows.

Personally speaking, I see no difference between Islamic Finance and ordinary finance, the only difference is that you pay a bit more for the "faith" discount. There is a big problem with the operationalisation part of Islamic finance but that's confidential, I am afraid! :)

But given the huge amounts of money sloshing around in the oil rich muslim world, its a shame that we cant get our legislation in gear to satisfy this. I do hope the government picks this up again and soon. All the London banks are already working hard on satisfying pent up demand and if we dont do it, then Malaysia, UAE, Bahrain etc. will walk away from this.

All this to be taken with a grain of piquant salt!!!