Interpreting Middle East Economic News and Analyzing Market Trends

Bank of England is looking to enhance its appeal to Islamic banks

 

Bank of England

Photo source: The Economist

The Bank of England is planning on stepping up its liquidity offerings for Islamic banks amidst growing competition from Kuala Lumpur and Dubai, both of which are commited to becoming global Islamic banking centers.  London is still the defacto global Islamic banking center due to the sheer volume of Islamic banking transactions that flow through it.  However, new contenders are starting to slice away at London’s pie.

 

The Bank of England is studying ways to increase the number of sharia-compliant assets that Islamic financial institutions can use in their liquidity buffers, a step towards reducing concentration risks in the sector.

The move comes as part of a broader push to promote London as a top centre for Islamic finance, in the face of growing competition from other centres such as Dubai and Kuala Lumpur.

Currently, sukuk (Islamic bonds) issued by the AAA-rated Islamic Development Bank are the only assets that meet the central bank’s criteria for use in the liquidity buffers of the 22 Islamic financial institutions operating in Britain.

These include six full-fledged Islamic banks such as the European Islamic Investment Bank, Bank of London and the Middle East and Gatehouse Bank.

In addition to reducing risks, expanding the eligible list could improve growth prospects for the industry and remove a potential entry barrier to the sector, a consultation paper released by the central bank said.

“Recognising only one asset also potentially limits the growth of existing sharia-compliant firms and creates barriers to entry for new sharia-compliant firms due to the difficulties that can be experienced obtaining the asset.”

The Bank of England’s proposal is in line with the approach of Basel III global banking regulations, which allow sukuk issued by high-rated sovereigns to be included in the liquid assets buffer without a haircut.

This would allow Britain’s proposed 200 million pound ($330 million) sovereign sukuk issue to be used, as well as other high-investment grade instruments such as sukuk issued by the Malaysia-based International Islamic Liquidity Management Corp.

Sukuk issued by sovereigns with lower credit ratings and other non-financial issuers could also be eligible, subject to haircuts and caps, the consultation paper said. The consultation will end on April 15 but no date was given for the proposed reform.

Britain first announced plans for a sovereign sukuk issue six years ago but that issue never materialised as the country’s Debt Management Office decided the structure was too expensive.

The new proposal is less than a fifth of the size of the original, and is designed to boost London’s status rather than to diversify Britain’s investor base to a significant degree.

Read the full story from Reuters.

 

It will be a while before another financial center seriously threaten’s London’s lead.  Dubai and Kuala Lumpur are ambitious, but their size is so insignificant when it comes to global banking centers.  Islamic banking, just like conventional banking, will always flow to where there is high liquidity, high volume and world-class regulation.  For now, London is taking the right steps to maintain its edge in the long-term.

 

One more note:  Remember all the cities around the world that tried to copy Silicon Valley’s business model?  Can you name any today? To my knowledge, none have succeeded because they haven’t found the magic formula. The same goes for London’s lead in Islamic finance.