With the Islamic finance industry estimated to be worth £1.3trn next year, it is no surprise that David Cameron wants the UK to cash in on the boom. Aiming to make London the capital of Islamic finance in the Western world, the Prime Minister last week unveiled plans for the UK to become the first non-Muslim country to issue an Islamic bond, reports Legal Week.
With a history of providing financial services to the Middle Eastern markets that goes back at least 30 years, proof of the UK's growing Islamic finance sector can be found in the developments of the Qatari-backed Shard Tower and Chelsea Barracks, as well as Malaysian-backed Battersea Power Station – all of which have been funded using Shariah-compliant structures.
But it is clear to leading Islamic finance lawyers that the UK has a long way to go before reaching a similar status to the likes of Dubai and Malaysia, which have already established themselves as major Islamic financial hubs within the Muslim world.
Clifford Chance's (CC) Dubai-based head of Islamic finance Qudeer Latif estimates that developed Western economies might only see about 10 per cent of global Islamic finance work compared with the volumes seen in the Middle East, which he put at roughly 60 per cent to 65 per cent. Meanwhile, Islamic finance itself might only constitute about one per cent of global financial assets.
However, Latif stresses that while it might seem like a drop in the ocean, the industry has grown twice as fast as conventional finance in the past two years, making it a worthwhile industry for investors.
While UK lawyers welcome the Treasury's planned sukuk launch next year, alongside a new Islamic index on the London Stock Exchange, they are not expecting to witness an immediate surge in demand for specialist advice. But it does seem to be a sign that London has regained a level of confidence in sukuk lost when the global financial crisis hit, and the product almost died out.
And while the sukuk bond might be comparatively small (valued at about £200m by next year), the more important benefit may be the message it sends the international community about the UK's commitment to accessing Islamic investors.
Norton Rose Fulbright partner Farmida Bi, head of the firm's Islamic finance practice in Europe, says: "The UK has the only Western system that completely allows for Islamic finance – we have the existing links to the Islamic world and the liquidity for it.
"The only thing missing was a high-profile transaction, and I think the sukuk issue is the landmark deal that can help UK corporates realise that there is money to be found in the Islamic markets.
"Hopefully, the announcement will create a larger volume of work, but we will have to wait and see. It has been very positively received – I've had many calls from clients in the Middle East and Asia since."
Growth of the Islamic finance sector globally in recent years has placed demands on law firms to spread their specialist advisers beyond the traditional Middle East markets, not only to Asia, but increasingly into Europe as well.
CC, for example, has more than 40 partners and associates in the Middle East with experience in Islamic finance, and about 10 in London.
Linklaters head of Islamic finance Neil Miller comments: "A huge amount of the industry is organised by financial institutions with headquarters in London. There is a need for lawyers based in the UK or trained in English law to provide advice as the English legal system is the dominant system governing cross-border Shariah-compliant transactions.
"We expect to deal with more of these types of transactions in London following this initiative. By issuing domestic sukuk, it would improve efficiency in the UK for all parties involved when it comes to balance sheets and can reduce both the cost of funding and operating costs. It is an important piece of the jigsaw."
But while the sukuk is an important step in tapping into the Middle East's liquidity, there are calls for more changes to laws in order to accommodate the more unusual types of structures that some deals call for.
Latif cautions: "One of the main challenges in the UK now is to make sure Islamic finance is treated the same as conventional finance from a tax perspective. The use of underlying assets for structuring means that there can be adverse tax consequences for Islamic finance deals.
"The UK has created a level playing field for many vanilla instruments, but not the more exotic structures that are common in Dubai or Malaysia. So in order for the UK's Islamic finance industry to continue to grow, it must continue to amend laws to accommodate these structures."