Once the exclusive domain of countries in the Middle East, Islamic finance is seeing high activity as cash-rich investors from the region scout for opportunities to invest their money beyond its golden shores - just as Asian countries are rushing into Sharia-compliant deals and instruments to line their pockets with petrodollars. These days, a law firm with a finance team that can structure and execute Sharia-compliant deals is bound to stay ahead.
The words 'Islamic finance' and 'Sharia-compliant' have been rolling off the tongues of lawyers around the world as the global gush on such deals deepens. The Islamic finance market has posted strong growth everywhere in recent years. According to Standard & Poor's, it has gone from US$500m worth of global sukuk - Islamic bonds - in 2001 to US$60bn in 2007. And, in 2007, there was about US$500bn in Sharia-compliant assets worldwide.
"There is a vast amount of wealth in the Middle East as a result of petrodollars and this is spurring tremendous growth in the area of Islamic finance. And areas which did not traditionally see Islamic finance involvement, such as sukuk, are now reporting a substantial increase. The idea is to develop more Sharia-compliant products to address the economic needs of these investors," says Abradat Kamalpour, partner in Ashurst's London securities and structured finance (SSF) practice, specialising in Islamic finance. The buzz about Islamic finance Sharia compliance means that a particular investment or financial transaction has been conducted or structured in a way considered 'legal' or 'authorised' pursuant to Islamic law. Compliance with Sharia is achieved by having a Sharia authority - either an individual or group of individuals possessing authoritative status in matters relating to Sharia-compliant finance - approve the particular investment or type of transaction. Most financial institutions retain a Sharia advisory board, which typically consists of three or more scholars who are recognised as authorities in Sharia-compliant finance and who decide whether a particular transaction is compliant.
Simply put, Sharia-compliant finance is achieved by the avoidance of interest or usury ('riba') and investment in prohibited ('haram') industries such as those to do with pork and alcoholic beverages, pornography and gambling.
"Religion governs every aspect of how this group of investors live, and that includes how they invest their money," says Nick Bryans, managing partner of Ashurst's Dubai office. "The purist approach in Islamic finance saw financial products that were largely uneconomic. The choice of financial instruments is more varied and more sophisticated now, compared to six or seven years ago."
Several firms, such as Lovells, Clifford Chance, Allen & Overy and Linklaters, have finance practices that specialise in Islamic finance both in the Middle East and outside the region. For example, London has been positioning itself as Europe's Islamic finance centre. One popular strategy currently employed by firms is to have a team - and others in capital cities, such as London - to 'prepare' the ground and transform non-compliant structures into financial instruments acceptable to Islamic investors.
Kamalpour advised Blomfield Corporate Finance as broker to the Family Shari’ah Fund on its US$32m placing on the Alternative Investment Market (AIM) of the London Stock Exchange. It is the first Sharia-compliant, multiasset class fund to gain admission to AIM and will provide investors with exposure to a variety of Sharia-compliant investments mainly outside the Gulf region. The placing attracted investment from wealthy individuals, families and institutional investors both in the Middle East and Europe.
“Islamic finance is very important as the sub-prime financing structures – which have been the root cause of the credit crunch – are not Sharia-compliant, so Islamic banks have not been affected. Plus there is a great amount of liquidity in the Gulf-based Islamic banks because of the high oil prices in the recent past,” says Shibeer Ahmed, head of Lovells’ Dubai office.
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