London has taken a decisive step towards becoming a global centre for Islamic finance, establishing the worlds first secondary market for trading bonds that comply with the Qurans strict laws on earning interest. These shariahcompliant bonds, or sukuk, are structured to pay profits from an underlying business, rather than interest, which is banned under Islamic law as the creation of money from money itself is considered sinful.

The development marks a significant new step for London in its fight with New York as the worlds premier financial centre. Although Islamic banking products are available in the US, officials there have not been as aggressive in promoting the concept as their counterparts in London. In contrast, business leaders and politicians in the UK hope that Islamic finance will provide a bridge to the Muslim world, both at home and abroad.

At present, an issuer of a nonMuslim bond can offset the coupon interest payment against profits, but an Islamic bond does not qualify for this relief as the coupon payment is based on profit rather than interest and profit cannot be offset against profit. The signs of life in a secondary trading market in London, where bonds are bought and sold once they have been listed, are also a key development for the fledgling Islamic financial market, which until now has seen almost no trading in shariahcompliant products.

London faces competition from places such as Bahrain, Dubai, Riyadh, Singapore and Kuala Lumpur as a centre of Islamic finance. There are more sukuk listed in Dubai than anywhere else, although it is yet to establish a secondary market. Most bankers forecast these centres will grow. But London has far more international reach and expertise.