Islamic Cars? Bah! Try Islamic Bonds

♠ Posted by Emmanuel in , at 11/13/2007 01:51:00 AM
Honestly, I'm a bit at a loss to explain why Proton Malaysia's bid to create an "Islamic car" has received so much press attention. I've already talked about Proton before, speaking of it as a prime example of an infant industry that never grew. It is not only losing market share back home, but it also never really developed a viable export market. This "Islamic car" marketing gimmick may be yet another dubious justification for the existence of a very marginal car producer. To me, there is nothing especially difficult about putting in a compartment for the Qu'ran and prayer scarves or putting in a compass that points to Mecca. Should these features prove popular, I'm sure Toyota and the rest will have similar features in short order that outdo anything Proton could come up with. And the cars themselves will be much better, of course.

For news of real consequence, try the phenomenon of Islamic bonds. Dubai, Abu Dhabi, Qatar, and others in the Middle East are trying to establish themselves as financial centers for the region by, among other things, offering Islamic bonds. As you are not allowed to charge interest under shar'ia law, this poses a special challenge to issuing debt instruments. Never let it be said that the British government is always a slouch when promoting the nation's commercial interests. To keep the City of London as a favored destination for Middle East finance, it has decided to improve investor access to sukuk bonds as it seems London's share of Islamic funds is falling as business heads to the Middle East. From the Financial Times:

The government will step up preparations this week for the launch of sharia-compliant bonds, known as sukuk, as it seeks to turn London into the world centre of Islamic finance.

Kitty Ussher, the Treasury minister, will tell City leaders she is launching a three-month consultation process and could use next spring’s Budget to put in place any legal changes that might be needed to launch the first western government sukuk.

Ms Ussher believes that the scheme will entrench London as “a global gateway to Islamic finance” and help Britain’s Muslims, who sometimes struggle to find sharia-compliant retail products such as mortgages.

The bonds could be used as vehicles to allow Muslims in Britain to invest in National Savings products through banks and post offices.

Islamic bonds are structured to pay profits or rent from an underlying asset or business, rather than interest, which is outlawed under sharia religious law.

Unlike conventional bonds, sukuk are akin to Islamic “investment certificates” representing ownership in the underlying asset. Returns are paid to investors in line with their proportional ownership.

The sukuk market has grown dramatically in the past five years. Nearly $40bn (£19.1bn) of these bonds have been issued this year, from virtually nothing in 2001.

On Wednesday, Ms Ussher will tell a high-level group of City executives – assembled by the Treasury to develop London’s financial services sector – that there is no question of her going cold on the project.

There had been speculation that the government was backing away from the scheme after the departure of its architect, Ed Balls, the former City minister, from the Treasury in June.

One member of the Treasury’s committee of experts on Islamic finance, which is advising the government on structuring and pricing the bonds, said: “The project did lose momentum after Ed Balls left, and it’s still in the early stages. It’s not a done deal.

“Doubts have been expressed over whether it would attract investors and the complexities of the legislation needed.”

However, Ms Ussher told the FT: “There is no question of delay at all. If anything, there is greater demand. We have been doing an enormous amount of work.”

Despite this, details remain to be solved, including the structure of the sukuk. Ms Ussher’s consultation paper refers to “risks relating to price and demand”.

British sharia-compliant bonds could act as a catalyst for big UK and western companies to launch similar securities in London, boosting the capital as a centre for Islamic finance.

The competition for business is fierce, however, with the Middle East increasingly seen as an attractive location to set up operations because of its oil wealth.

London’s share of Islamic funds, which invest in only sharia-compliant products, has dropped by almost a third in the past five years as more of them move to the Middle East, where they see big potential for business.