Scotland perfectly positioned to cash in on Islamic financial products

[Uthman]

Industry leaders believe Scotland’s ethics-based monetary sector is well placed.

Scotland's proud tradition of investment management makes it ideally placed to cash in on the multi-billion pound potential in the growing demand for Islamic financial products, a conference will be told next month.

Scotland's first-ever Islamic investment conference, to take place in Edinburgh, is a joint initiative between Scottish Financial Enterprise (SFE) and the Glasgow-based Islamic Finance Council (IFC). It will aim to outline how to offer investment products that comply with the principles of Islam.

Speaking exclusively to the Sunday Herald from Dubai, Omar Shaikh of the IFC said that Scotland's distinguished fund management heritage, coupled with the mutual roots of many of its largest life companies, means it is a short step for local firms to tap into growing demand for Islamic investments.


"The reality of today's market is that people are coming back to ethics and values, and Islamic finance is fundamentally ethical finance." said Shaikh. "It is a set of principles on how you do business, which companies you fund and how you conduct yourself. These transcend any culture and nation.

"If you look at Scotland, it has a very proud heritage in ethical and faith-based finance, which sits hand-in-hand with Islamic finance. A good example is Trustees Savings Bank, which came from the church. It is faith-based ethical finance, and these are the values we think Scotland should be focusing on."

Shaikh said that refocusing on such principles would allow Scotland's financial sector to recover from the humiliating near-collapse of RBS and HBOS.

"In Scotland, our strength is that we have got a very strong fund management industry, which wasn't built over 18 months, and it's not going to collapse over 18 months either. Yes, it is under strain, but you could say that about every financial centre in the world right now. Leadership is here in Scotland and that will only work in our favour in the future."

Scottish fund management groups are far from alone in identifying the Gulf states as a target market for their institutional fund management services. The authorative Merrill Lynch Capgemini World Wealth Report estimates that private wealth across the Middle East will grow by 15.3% between 2007 and 2012. A separate study by consultants McKinsey last year claimed that some $4.68 trillion of new wealth would be generated by 2011, and that figure assumed a prolonged oil price of only $30 a barrel.

Scottish Widows Investment Partnership already manages £60 million of institutional money on Islamic terms, while last month Aberdeen Asset Management acquired an Islamic fund licence in Malaysia with the aim of further expanding the £70 million it already manages on a Sharia basis. SFE said it organised the conference because many of its members had expressed interest in moving into the field.

Owen Kelly, chief executive of SFE, denied that his members are merely jumping on a bandwagon. He said: "Scotland is an international centre and our fund managers look for opportunities to serve customers worldwide. We worked in China last year and we will be doing more work with China this year, and you could make the same charge that we are chasing sovereign wealth.

"I don't think that is right, I think we have skills which are internationally attractive and, yes, we are marketing internationally, but that is because it is good business."

For his part, Shaikh believes that if a greater number of fund managers are able to offer Islamic asset management, the demand for Islamic products will increase.

He explained: "If we just focus on the Gulf, in terms of the high petro-dollar returns, what we have here is trillions of dollars of excess wealth. So if we want to target that wealth how do you go about doing that? First, of all you need a quality asset, and it needs to be the right price."

Shaikh points to research which found that around 10 to 15% of Muslims in the Gulf said they did not care how their money was invested, just about returns. However, a similar percentage said they would invest only on Islamic terms.

"Crucially, though, some 70% said that if it was possible to match the availability, quality and the pricing of mainstream products, then they would prefer to invest in Islamic products.

"So from a captive value of 15%, all of a sudden, provided you can meet the product quality and price, you can get up to an additional 70% - which gives you 85%," continued Shaikh. "So it is not just about getting a slice of the pie, but that that slice of pie can massively increase. And it is competition that will drive the size of the slice."

The other key thing is that the size of the "pie" will increase alongside any rise in the price of oil. With next month's event, SFE and IFC are keen to see Scottish fund managers begin to lay the groundwork that will enable them to secure a share of this fast-growing market.

For details of the Islamic Investment Conference on the April 2, 2009 see www.sfe.org.uk

HOW IT WORKS

Islamic investment products must conform to Sharia principles. In simple terms, this means the earning or paying of interest ("riba") is strictly forbidden and funds cannot invest in companies involved in alcohol, pornography, gambling or banking.

The same rules apply whether the equity is listed or unlisted.

It is possible to buy property in a Sharia-compliant way, both the Shard and Chelsea Barracks in London were purchased by investors from the Middle East using Islamic structures.

The most common form is "murabaha", where an intermediary buys the property and then sells it in instalments to the ultimate owner over a number of years. The intermediary earns an agreed fee.

Companies can raise finance for expansion using Islamic bonds called sukuks.

As the payment of interest is banned, a sukuk issuer sells investors a certificate and then rents it back until a set date when the issuer buys it back for an agreed sum.

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