Central role

The Midlands business and legal community has emerged as the surprise beneficiary of the increasing profile of sharia-compliant finance.

For an increasing number of lawyers, particularly those working in larger City firms, those based in regions with large Muslim populations, or those who have international clients operating in the Muslim world, there has been a significant increase in demand in recent years for legal advice in connection with these structures such as ijara, mudaraba and sukuk. All the signs are that this is set to continue for the foreseeable future.

While the reasons for this increase in the wider legal market are clear, the implications for the Midlands economy – and local lawyers – are less certain.

Muslim influence
Britain has strong historic links to many Muslim countries and continues to be a significant trader and investor in regions where Islam is the dominant religion. Furthermore, approximately 2 million Muslims live in the UK and a further 500,000 visit each year – a large number of them are based in the Midlands or visit for business purposes.

Given the City of London’s position as one of the world’s two truly global financial centres, it is logical that London, and the UK as a whole, should look to capitalise on this and aim to be the financial partner of choice for Muslim countries globally, an ambition that both Prime Minister Gordon Brown and Secretary of State for Children, Schools and Families Ed Balls have voiced in recent months.

Previous attempts to tap into the UK Muslim market have failed, mainly as a result of difficulties in finding regulatory structures that worked within the UK regime, a lack of demand driven by a lack of knowledge of products and the higher transaction costs including specialist legal advice.

This is not the case now. A combination of active promotion by the UK Government and major Western banks rolling out Islamic products for both retail and commercial borrowers are major drivers, along with an increasingly flexible regulatory regime. To facilitate this, UK law firms have been, and continue to be, at the cutting edge of developing the legal mechanisms and documentation to narrate these arrangements in a way that satisfies the requirements of lenders, borrowers and the sharia committees who ultimately decide whether or not a structure is compliant.

Impact on the Midlands
But where does all this leave the Midlands when it comes to sharing in the economic upside of an industry that currently has an estimated $500bn (£246.92bn) of funds under management worldwide and an undeniably impressive growth rate of 15 per cent each year?

There are two ways in which the Midlands economy will benefit from this fast-growing market. A number of surveys have shown that business creation within areas with large local Muslim populations is higher than within other sectors and this is a catalyst to the development of the local economy and leads to an increase in demand for Islamic funding solutions.

As a result, the Midlands region is at the forefront of the domestic market for Islamic finance. Evidence of this can be seen in the location of the headquarters of the Islamic Bank of Britain in Birmingham, with its 30,000 customers and £100m of funds under management, as well as the fact that high street names such as HSBC, Royal Bank of Scotland, LloydsTSB and West Bromwich Building Society have all set up Islamic finance teams based in the West Midlands.

This, in turn, has created excellent local knowledge and expertise in Islamic finance. Birmingham and the surrounding area is well served by the necessary professional services such as legal, accounting and auditing as well as back office functions and administration.

It is this cluster of skills that has opened another channel through which the region can benefit. The level of expertise in the Midlands is second only to that in the City of London and, when allied to a lower cost base, the Midlands is well placed to work with the City in realising the Government’s ambitions for financial partnership in this area.

Developing Islamic finance
These opportunities were brought more sharply into focus in May 2007 when senior representatives from the City of London and business leaders from the West Midlands met to look at ways in which the West Midlands could work with London to help consolidate and develop its position as a major international centre for Islamic finance.

Already much of the legal work being done by Midlands advisers on Islamic finance transactions is instructed by overseas clients, part of a trend for deals to be written out of Muslim countries, but using UK-based advisers.

This in itself is a function of two main factors. First, English law is the governing law of many of these funding arrangements and thus the UK advisory community is well placed to service this market.

Second, Muslim communities in the Midlands have strong links with their home countries and carry on significant amounts of business with them. Demand for legal advice in relation to Islamic structures comes from these sources as well as from the UK-based Muslim population.

A good example is Dubai. The Emirate has become a major international trade hub for all the Gulf states as well as the Indian sub-continent and East Africa, which includes many major Muslim states, and a geographical bridge between East and West.

Many UK companies have established offices there and the global financial institutions have been quick to set up shop as the regulatory framework has improved. Many of the major UK law firms have some interest in the region, if not an office, and the developing capital markets have all resulted in a significant flow of work from there as frequently local offices do not have sufficient resources or skills available and so work is referred back to the UK.

Midlands’ Prospects
While prospects for the Midlands’ market look good, there will be strong competition, principally from the City, other parts of the UK and from the developing capabilities of law firms in Islamic countries. In addition, it is thought that there is a certain ambivalence on the part of many UK-based Muslims to take up sharia-compliant products and in the wider context there are concerns that a fall in the price of oil would have a significant negative impact on this market.

For the Midlands, a strong local market, a supporting role to the City on blue chip international deals and an increasing reputation as an international service provider in its own right could mean some very good times ahead.

Alan Shanks and Andrew Madden are partners at HBJ Gateley Wareing