The law firms that have grasped the importance of Islamic Finance as a practice area are way ahead of the game, writes Polly Botsford


Change is sometimes inconsequential, and at other times fundamental. The key is to recognise the distinction as it happens. According to the experts, the arrival of Islamic finance as a practice area is not a superficial development, but a radical one, and the law firms and lawyers that understand this are way ahead.



Islamic finance, broadly defined as finance which is compliant with Shariah law, has in the past two years grown from a niche area to an HM Treasury-endorsed mainstream financial product with current assets of about $300 billion.



The Islamic Finance Information Service (IFIS) has been tracking the sukuk (an Islamic version of a conventional bond) market since 2000, when its value was a mere $336 million. It is now valued at $85.9 billion. Rakiya Sanusi, product manager at IFIS, says: ‘The sukuk is the fastest-growing market compared with the conventional bond market and saw a 75% increase in the figures from just last year.’



Banks such as Lloyds TSB, Royal Bank of Scotland and HSBC are all offering Shariah-compliant products, while London is also the home to a fully Shariah-compliant retail bank. Since 2003, the Islamic mortgage market has grown to more than half a billion pounds – it has witnessed an increase of about 50% in the last year alone.



In the last few years, the government has made fundamental changes to allow tax parity for the many financial techniques employed through Islamic finance which were previously disadvantaged by existing fiscal legislation. This year, it has set up an Islamic finance experts group within the Treasury to act as ‘an industry sounding board’. The group has begun a feasibility study into whether the Treasury can and should issue its own ‘sovereign’ sukuks alongside traditional HM Treasury bonds.



The ‘should’ question is a rhetorical one since Gordon Brown announced just over a year ago, when he was chancellor, that he wanted ‘to make Britain the gateway to Islamic finance and trade’. Neil Miller, global head of Islamic finance at City firm Norton Rose, is the only legal member of the group, which met for the first time last month under the chairmanship of City minister Kitty Usher.



But is Islamic finance just another way to structure financial products, and one that just happens to get a lot of media attention? Roger Lee, an economic geographer at Queen Mary, University of London, does not believe so. He says: ‘There is a fundamental difference. If you consider that economies are cultural, that they are socially constructed by those who operate them, then a capitalist economy has certain standards. But Islamic finance has very, very different ones.’



Amjad Hussain, an Islamic finance expert at City firm Eversheds, who is about to move to its office in Qatar, agrees: ‘Islamic finance is not just another way to structure a product. It is about considering the spirit of Shariah law as well as the technical aspects. It is about fair trading, about not spreading debt, about reaching for an ethical system of financing.’



To begin with, there are prohibitions over certain investments, such as alcohol, armaments, gambling, pork, pornography, tobacco, and financial services. But there are also deeper, philosophical differences, the main one being that the concept of interest is banned under Shariah law. The notion is that you cannot simply make money from money. Mr Lee elaborates: ‘Islamic finance says that someone who lends money should also be a partner in the enterprise – and should take some of the risks and responsibilities that go with ownership.’



The sukuk is a good example: a conventional bondholder pays money for the bond and then receives interest in return; but with a sukuk, the holder must get a beneficial interest in the underlying asset – and that asset must be tangible. Mr Lee says: ‘Islamic finance reflects the desires of those investors who need to engage with the capitalist economy but want to do it in their own way – and that is in a religious and ethical way.’



Of course, in terms of the City, the value of the Islamic finance market is still nano-sized. The Financial Times estimates it to be only 1% of total global banking assets (though, of course, that is 1% of a very large number). But it would be wrong to dismiss it as a passing trend. As Indraj Mangat, head of Islamic finance at Eversheds, says: ‘Islamic finance is now a mainstream product.’



So Islamic finance is different, new and here to stay – which is why some law firms are building up expertise very fast. At the moment, the majority of their clients divide into two distinct groups: banks and investors in the Gulf and the UK banks. Firms are, therefore, building up a client base in parallel ways. First of all, they are getting greater exposure in the Gulf and the Middle East, where most of Islamic finance’s investors originate. There has been a headlong rush by City firms to open offices in the region over the past couple of years, whether in Dubai, Qatar or even now in Saudi Arabia.



Firms which have dedicated Islamic finance lawyers are also exploiting their specialism with UK investment banks and other financial institutions. Farmida Bi, a partner and head of Islamic finance at Denton Wilde Sapte, says: ‘Investment banks are cautious and they want to see a specialist. We have expertise in the sukuk, so we have an edge on other law firms that we do not have in the conventional capital markets. The ability to do this work does open doors.’



Ms Bi believes that knowledge of the Middle East region has given her firm a headstart. ‘Investment banks require industry knowledge and country knowledge, and Dentons has the widest breadth of offices out there,’ she says. It has seven offices in the region, having just opened in Qatar, as well as ones in Cairo and Istanbul.



There are still only a handful of firms which do most of the Islamic finance work, Norton Rose and Dentons being the two who ‘have been doing it for a long time’, says Ms Bi. Some firms have Islamic finance lawyers whose expertise spreads across different departments, such as capital markets or property, while others keep the team distinct.



For those individual lawyers with knowledge of Islamic finance, their talents are in huge demand. Kara Penridge, managing director of recruitment consultant Garfield Robbins International, says: ‘It is a very specialist area. The need for financial lawyers generally, and also with Islamic finance experience, is very high. More firms are looking for people to get on board. Firms are now looking overseas, usually in the Middle East. Most of them will sponsor people to work in the UK.’



The shortfall in lawyers is partly because the practice area is so new and it is hard to get the experience, but it is also because some lawyers are afraid they will not understand it because it is culturally different: ‘If you are a Muslim, then you know Shariah law,’ Mr Hussain says. ‘You have grown up with these principles and you understand them.’



But Aziza Atta, a lawyer in the Islamic finance group at Norton Rose, says non-Muslim lawyers should not be afraid of it. ‘It is like anything – you learn by doing it, by doing research and going on training courses,’ she says. ‘There is nothing mythical at all.’ However, she concedes that at the moment it does ‘tend to be Muslims, Arabs, and Middle Eastern lawyers who are used to hearing a lot of the terminology’.



Nor is Islamic finance only about Muslim investors. ‘The one issue I have with Islamic finance is the word “Islamic”,’ says Mr Mangat. ‘We did a leverage transaction where the equity was done on an Islamic basis but none of the individuals were Muslim. They used the Islamic basis because the pricing was better.’ He is not the only one paying attention to terminology – UK legislators use the expression ‘alternative finance’ instead. But his point is clear: ‘If UK companies, Muslim or non-Muslim, want to get involved in opportunities in the Middle East, like real estate for example, they will have to do joint ventures in accordance with Islamic principles. There will be no option.’



Putting the business need aside, Ms Atta says that, for lawyers, it is a particularly satisfying area to work in. ‘It is very creative, structuring the finance,’ she says. ‘You have to know conventional finance and Islamic finance, and work with the two to design new structures. You get to work with interesting people, the scholars, local counsel in the Middle East, and it’s exciting to be in an area that is high profile.’



The excitement, like this season’s latest trend, is probably not sustainable, but Islamic finance looks more like a permanent feature of the landscape.



Polly Botsford is a freelance journalist