DAR AL HARB - U.K.: ISLAMIC FINANCE AKIN TO THE "EMPEROR'S NEW CLOTHES"

Islamic finance is not a licence to print money

Everyone wants to be a millionaire and, it would seem at City law firms, everyone wants to be in Islamic finance. But do the two necessarily go hand-in-hand?

Well, not a day goes by without one firm or another crowing about the latest ‘first’ to hit the rapidly-evolving sector, or some prominent new Islamic finance recruit. Among key recent deals, Clifford Chance this year advised Aldar Properties on the $2.5bn (£1.3bn) first Islamic convertible bond with Denton Wilde Sapte as underwriter counsel. In March, Allen & Overy advised the underwriters on a $750m (£379m) Islamic bond opposite Dentons client Dubai Islamic Bank, the first sukuk to be listed in Dubai and London.

Obviously the market — reckoned by some to cover $500bn (£252bn) in assets — is growing swiftly and Standard & Poor’s estimates that the value of Islamic debt securities will nearly triple to $160bn (£81.6bn) within three years. With the UK Government in March announcing reforms to give sukuks the same tax relief as conventional debt securities — part of a concerted effort to make London the western capital for Islamic financing — advisers’ enthusiasm is understandable.

But the practice — which sees commercial transactions structured to comply with the Koran’s ban on payment of interest — is not quite the meal ticket it is assumed to be. Partly this is due to the emphasis on product development and innovation — a trend, of course, that rapidly results in commoditisation. This has been amplified by the second generation of Islamic finance, which focuses on creating Sharia-compliant debt securities and, increasingly, derivative-based and hedging products.

As such, the original financings that were modelled on syndicated lending are now being viewed as commoditised, with clients expecting fees commensurate with straight loans. It is also rarely noted that a number of structured finance lawyers take a jaded view of Islamic finance, regarding it as akin to the Emperor’s news clothes, even if there is money to be made from offering such in-demand tailoring.

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1) Islamic finance is not a licence to print money