The global Islamic financial industry stands to benefit from the UK’s development as a more attractive marketplace for Syariah-compliant financing and investment instruments following initiatives announced in the UK budget on March 21.

Standard & Poor’s Rating Services said on March 23 that although Dubai has been the most active trading center for sukuk notes so far, this amendment to the tax law in the UK will make London more attractive for issuing and trading sukuk and provide greater clarity and certainty for investors and issuers.

"We estimate that up to 300,000 retail customers in the UK would be ready customers for Sharia-compliant banking services," said S&P credit analyst Anouar Hassoune in a report entitled -- "World's Islamic Finance Industry To Get A Boost From UK's Development As A Major Marketplace."

"The establishment of these services in the UK would extend the reach of the Islamic financial model--so far still concentrated in a few countries in the Middle East and Muslim Asia," added Hassoune.

"As for wholesale banking, London has the capacity to become a hub for Syariah-compliant financial flows that seek recycling in Europe."

As competition heats up among financial centers to attract Islamic issuers and investors, the City of London has a number of competitive advantages compared to its emerging market counterparts.

"These include its deep, efficient markets where investors can switch from one asset class to another, and secondary market liquidity," he said.

London already has more banks supplying services under Islamic principles than any other Western financial centre and is the only centre actively involved in Syariah-compliant market intermediation not located in a Muslim country.

The overall sukuk market size was estimated to be close to US$70 billion (RM242.92 billion) at year end 2006 globally, including those issued from Malaysia, Pakistan, and of course the Middle East. This is expected to accelerate, approaching US$100 billion according to least conservative forecasts within the next five years.

The largest sukuk to date were those issued by Dubai-based Nakheel Group for US$3.52 billion early in the first quarter of 2007. These notes were listed in both Dubai and London.

There are more sukuk listed in Dubai than anywhere else, but the secondary market is virtually non-existent.

In London, the secondary market for sukuk is less than US$5 billion at the end of March 2007, although this is expected to accelerate. Among listed sukuk, S&P rates an outstanding amount close to US$6 billion or roughly 50% of sukuk listed globally.

The report explores the U.K.’s two-pronged strategy to build an alternative home for Islamic finance, including Syariah-compliant retail, wholesale and investment banking.

The UK sovereign itself might be interested in issuing sukuk notes. Such issuance would be of high interest for investors inclined to be in line with the principles of Islamic finance.

What is still lacking for Syariah-compliant services to become more comprehensive in the UK is a meaningful Takaful (or Islamic mutual insurance) company.

Licensing a takaful company, or providing blessing to conventional insurers to offer takaful products could be the next step in the UK’s strategy to further enhance its position as a leading Islamic financial centre.