Britain goes after Middle East cash with new Sharia bonds

British Prime Minister David Cameron and H.M. Sultan Hassanal Bolkiah of Brunei Darussalam leave the main hall for lunch during the Leaders Panel at the 9th World Islamic Economic Forum at ExCel on October 29, 2013 in London, England. 

British Prime Minister David Cameron is announcing a government bond that's approved under Islamic finance rules. What's called "Sharia-compliant finance" is rich in the vein of capitalism and involves certain filters, such as not investing in companies that gamble or sell alcohol.

But it's also about not charging interest, which is prohibited under Islamic law. For example, if want to buy a car, typically you get a loan for the cost of the car and then pay the lender back plus additional money for interest. Under Sharia rules, the bank might buy the car and sells it back to you at above the market price. You pay it the lender back in installments, you get a car, and the bank profits.    

"You cannot charge interest -- which is a bit of a problem -- because one of the principle features of a bond is that it pays interest," says BBC correspondent Simon Jack in London. "So how do you get around that? Well, one of the ways you do that is you have, rather than interest, you'll have an underlying asset -- which produces some sort of return -- so in a way, it's profit rather than interest."

The new bonds are seen as an acknowledgement by the U.K. of the growing financial clout of the Islamic world.

"If you look at places like Dubai and Abu Dhabi, and other centers in the Middle East, there are trillions of dollars worth of investments which trade on a daily basis," Jack says. "So London and other centers want to get a piece of this." 

 

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