Islamic Finance: Dominating The Global Banking Industry

The Islamic financial industry is flourishing - and not just in the Middle East. Barry Cosgrave, senior associate in the finance group at Shearman & Sterling LLP, tells us why.

Having suffered an inevitable slowdown during the global financial crisis, Islamic finance is once again on the rise, with growth now being seen outside the traditional heartlands of the Middle East and South East Asia and taking on an ever more innovative and global flavour.

The announcement by the United Kingdom government of its inaugural £200m Sukuk issue (Sukuk is the Islamic equivalent of bonds) is perhaps the most high-profile example, but first of a kind issuances by FWU AG in Germany and Tilal Development Company in Oman, as well as innovative structures employed in the Axiata Sukuk in Malaysia and the Sadara Sukuk in Saudi Arabia clearly illustrate that the Islamic finance industry is moving forward.

What has led to this increase in activity? The growth in Islamic finance is down to certain key factors which probably fall into three main categories: the continued strong cash position of Islamic investors; the de-mystifying of Islamic finance products; and the growing familiarity of Islamic finance professionals with the needs of Shari'a scholars which has led to consequential efficiencies in implementing Islamic structures.

Whilst there has been a noticeable improvement in access to liquidity since some of the bleaker days of the recession, it is no secret that capital is still hard to come by for a number of businesses. Islamic investors in the Middle East remain cash rich but lack asset classes in which to invest. Whilst the Islamic finance market in South East Asia has traditionally been domestic, Middle Eastern investors tend to be more outward looking, which drives overseas investment. However, those investors that need to invest in line with Shari'a principles have often found a lack of assets in which to place their funds, resulting in a stockpiling of cash resources.

Traditionally, Shari'a-compliant instruments have been viewed with a great deal of caution by conventional investors. Much of this was down to a simple lack of understanding of what were perceived to be mysterious structures with complicated names. However, as an increasing number of Sukuk have run through the maturity cycle, it has provided an illustration of how Islamic instruments bear many of the characteristics of conventional finance products.

Finally, Islamic finance has become...