Shopping for a business loan during a global credit crisis is tough work even if you're a fast-growing start-up like Ireland's Blue Ocean Wireless. And the scrutiny can cut both ways. Blue Ocean, which supplies wireless communications for merchant shipping, was giving a closer-than-normal look at whether possible lenders could be counted on amid the ongoing financial shakeout.
When the company got a $25 million loan this fall, it came from what might seem an unusual source: the Bank of London and the Middle East, or BLME, which strictly follows Islamic sharia law rather than conventional western banking practices. Islamic banking requires transactions be structured in alternative ways since the rules ban interest and trading in debt. Blue Ocean is one of many European companies benefiting from a surge in Islamic financing that's pushing sharia-compliant banking into the mainstream and extending its appeal to non-Muslims. The sector's growth comes at a time when the western banking system is caught in a liquidity crisis. Blue Ocean took comfort in the fact that BLME draws on the petrodollar surpluses of Persian Gulf oil producers. "The liquidity was there," says Blue Ocean's chief financial officer, Tariq Aslam.
The boom in Islamic banking is providing a crescent-shaped sliver of good news for the City, London's beleaguered financial district. It's fast becoming the main hub of Islamic banking outside the Middle East, a development encouraged by Britain's Labor government, which laid out the welcome mat to sharia-compliant banks several years ago. "The government sees it as another way to draw business to London, to bring investors to the U.K.," says Duncan McKenzie, director of economics at International Financial Services London.
Growth field. London now is home to 25 companies offering some form of Islamic financing. BLME is the largest of five wholly sharia-compliant banks operating in Britain. The first, the Islamic Bank of Britain, opened in 2004, and the number is expected to double within five years. Moreover, most of Britain's conventional banks also have established "Islamic windows," units that offer sharia-compliant products. Globally, the sector's total assets are pegged at between $500 billion and $1 trillion and growing at a rate of 10 to 15 percent a year.
Certainly, business is brisk at Kuwaiti-owned BLME, which is somewhat ironic, given that it opened its doors in July 2007, on the eve of the banking crisis. It is just completing a big leasing project for a major transportation company, and other deals it has sealed this year include financing for apartment buildings and a language school in London. It also provided an $11 million loan to RecovCo, a British aluminum reprocessor that is expanding its operations in France. For the first six months of this year, BLME reported pretax profits of $2.7 million and its assets more than doubled, to $931 million.
The basic concepts of Islamic banking go back 1,400 years, but the world's first modern Islamic bank didn't open until 1975. And the sector didn't really blossom until five years ago, when it was buoyed by rising oil prices and the strengthening economies of Asia's Muslim countries. Sharia law prohibits investing in certain industries or products, including alcohol, tobacco, pork, and pornography. The Koran also forbids usury, so financial transactions are structured to rely on income in the form of rents or profits from the loan, technically not interest. Sukuks, for instance, are a type of Islamic bond backed by ownership of a tangible asset that produces a financial return. Another popular instrument is the commodity murabaha, essentially cost-plus financing, which involves the sale and repurchase of a commodity to fund a loan.
The financing BLME arranged for Blue Ocean, for example, was a commodity murabaha. Here's how it worked: The amount of the first portion that Blue Ocean wanted from its $25 million loan arrangement was relatively small. So an appropriate, low-cost commodity was selected to accommodate the transaction, in this case special high-grade zinc. The bank purchased the commodity—an amount equal to the cash Blue Ocean wanted to withdraw—then sold it at a small profit to the company for the same price on a deferred payment basis. Blue Ocean, with the bank's assistance, then resold the metal at the original purchase price, thus raising the cash it wanted. All transactions occurred nearly simultaneously so that the deal wasn't whipsawed by market price fluctuations.