At the outset I would like to express my thanks to Mr Tariq Sheikh and Omar Shaikh for inviting me to speak here today and I fully support the work undertaken by the Islamic Finance Council in their efforts to develop and promote the Islamic finance industry.
I have a very busy schedule but I am pleased to be here as Omar Shaikh is like a son to me.
As Islamic arrangements are mutual arrangements it is very appropriate that this dinner is being held in Scotland. There is a long history and culture of mutuality in Scotland and it must be noted that Scottish Widows was founded in 1815 as Scotland’s first mutual life office. Subsequently a number of life offices were established and at one time there were nine long established organisations in Scotland including Standard Life which was once the largest mutual life office in Europe. Standard Life was established in 1825.
As a teetotaller I was interested in the history of Scottish Union which was originally founded as the Scottish Temperance Assurance Society Ltd. by Adam Roger who despite being a brewer’s son, was a teetotaller who felt that temperance was not only healthy but good for business as well.
I have been a great supporter of mutual offices and in fact some years ago I personally dealt with the second contracting out pension arrangements in the country which I placed with Scottish Provident. I have also believed in the building societies with their mutuality arrangements where there was a great deal of accent on prudence and good housekeeping. This is the main reason why I am attracted by Islamic Financial arrangements and I have also recently spoken in favour of credit unions in the House of Lords.
Modern Islamic finance emerged in the mid 1970s with the founding of Islamic banks but the growth has been very rapid since the 1990s. The market is now worth over 750 billion dollars globally. The United Kingdom has Shariah-compliant assets in excess of 18 billion dollars and it comes 8th in the Bankers league which is the highest amongst all Western countries.
The annual growth of Islamic finance exceeds 30% per year and it’s the world’s fastest growing financial sector. The growth however on Islamic insurance is approximately 20% per annum which outstrips the 2.5% annual growth rate for conventional insurance premiums.
There are now more than 300 Islamic banking institutions spread over 51 countries as well as an additional 250 mutual firms that comply with Islamic principles. So there is already a large structure for Islamic finance in place but I must emphasise that the majority of these institutions are in the Middle East and the Far East. There are therefore definitely more opportunities in the United Kingdom for expansion.
In the United Kingdom, we have one Islamic retail bank and four wholesale banks. In addition there are large banks like HSBC and Lloyds who have windows transacting Islamic financial activities. Furthermore there is one Islamic insurance company which is currently not writing any new policies and is in a run-off situation. I believe there are opportunities for institutions to look into the revival of this company and rearrange how the business is transacted in the future.
I would also like to say that in the United Kingdom there are a number of law and accountancy firms which provide professional services in Islamic finance. There are over 50 institutions offering educational training products in Islamic finance which are more than what is available in any other country.
I wish to declare an interest as I have applied to the FSA for the registration of a company that will provide one-stop services for Islamic finance which will undertake all classes of Islamic financial activities, insurance and training.
I would now like to discuss why it matters for us to transact Islamic finance and insurance. By undertaking these activities we can have long-term growth in banking, Islamic bonds which are called sukuks, Islamic insurance which is called Takaful and asset management. By promoting our activities, the United Kingdom would enhance its standing as an international financial centre and I would like to see more activities being undertaken in Scotland. In view of the culture of mutuality which has existed in Scotland over a period of many years, Scotland is the natural home for Islamic financial activities.
The Islamic banking and insurance arrangements must be approved by a board of Islamic scholars and a financial institution would normally have 3 or 5 Islamic scholars. The Shariah compliant arrangements must adhere to the following principles.
1. The risks need to be shared amongst all the members. In other words it must be a mutual arrangement.
2. Prohibition of any form of interest which is called Riba
3. There needs to be backing by tangible assets to avoid speculation which is called Garrar
4. There should not be any investments in any activity which is not compatible with Shariah laws as these are haram. These activities include any investment connected with gambling, alcohol, conventional financial services and tobacco etc. All of the investments need to be ethical.
The Islamic financial and insurance products will appeal to Muslims as well as non Muslims. A considerable number of people who arrange Islamic plans are non Muslims because of the ethical and mutual structures of these arrangements.
The whole world is suffering from the financial crunch which has come about as a result of bad practices and lack of appropriate housekeeping. The concept of prudence was thrown out of the window and there was greed and short-term practices. The crunch has adversely affected the economies of many countries and people are in dire straits. The scenario is totally undesirable. If more institutions had followed Islamic values then perhaps the situation could have been alleviated.
Islamic finance believes in an ethical form of investment and we also invest in businesses which benefit the society generally and good for the environment. We therefore fulfil a social function.
I now wish to talk about sukuks which is the Islamic financial equivalent of bonds. Sukuks replicate characteristics of conventional bonds without infringing the rules of Islamic principles. Sukuks can be bought and sold between holders of the instrument and provide finance for a fixed period of time which is typically 3 to 5 years or indeed even longer terms are possible. Sukuks provide investors with a flow of regular payments without involving interest. Sukuks can be structured in a Scottish context, for Government funding requirements as well as corporate requirements. There is a great amount of appetite for the Sukuk market and I feel there is considerable potential and more can be done to issue sukuks in Scotland as well as London.
Although the United Kingdom is one of the leaders in Islamic finance within the Western world, we need to be proactive as I feel that we will face competition from Paris, Luxembourg, Dublin and New York.
Scotland has been a leader in the setting up of mutual life offices such as Scottish Widows and Standard Life and banks such as the Royal Bank of Scotland and Bank of Scotland and I feel that by being proactive on Islamic finance, it can be amongst the leaders in this field.
An organisation can arrange Islamic finance or insurance operations by three broad motives which are as follows:
1) Establishing a stand-alone institution
2) Setting up a specialist subsidiary
3) Having a window/branch operation