City law firms welcomed the first issue of an Islamic bond in a European state last week but called for more sophisticated approaches by UK institutions to harness the potential of Islamic finance.

German state Saxony-Anhalt's ¤100 million (£66 million) bond issue last month - a sale and leaseback of previously state-owned assets - was structured in such a way as to make it acceptable to Islamic investors not wishing to breach Sharia prohibitions on interest payments.


It is the first time such bonds - or sukuks - have been issued in Europe, joining countries such as Bahrain, Qatar, Lebanon, Turkey and Malaysia.


City firm Trowers & Hamlins estimates that the Islamic finance market is growing at a rate of 15% each year, and partner Neale Downes said: 'There is a growing acceptance that Islamic finance instruments can compete with conventional financial tools. For example, 70% of the users of Islamic financial products in Malaysia are non-Muslims.'


Mohammed Paracha, an associate with City firm Norton Rose who sits on the Bank of England's Islamic finance working party, said: 'Sovereign [state-issued] bonds have been issued in many jurisdictions. We now need to encourage European players to issue corporate sukuks. I already know of one such corporate bond being prepared in Europe and that's the development I see happening in the next couple of years.'


Norton Rose client The Islamic House of Britain is currently hoping to be authorised as this country's first Islamic bank.


Mr Paracha said the use of corporate sukuks and the potential for a new Islamic bank in London would be a boost to the UK's Islamic finance market.


Sarah Gooden, a partner at Trowers and co-chairwoman of its Islamic finance group, said: 'I don't see why such sukuks could not be issued in the UK. In Saxony, the driver for the deal is that there is a large amount of Islamic money looking for investment... there are already sukuks on the Luxembourg Stock Exchange so it shouldn't be too great a step for London to adopt some rules.'