A story surfaced in the Malaysian media last September suggesting that the ESB was planning to issue an Islamic-compliant bond, or sukuk, as part of its future funding arrangements.

Sukuk are structured to pay profits or rent, rather than traditional coupon interest, which is forbidden under Sharia law, and are typically underpinned by physical assets with clearly identifiable income streams.

With the ongoing credit squeeze from the debt crisis and uncertainty still stalking capital markets, many firms are eyeing up the Islamic liquidity pool as an alternative source of finance.

Supermarket chain Tesco recently issued a sukuk for its Malaysian unit as part of its conventional debt-raising activity, underscoring the strength of its brand in the region.

As it turned out, the ESB had applied to local regulators in Malaysia for permission to issue a bond, with the aim of raising €1 billion.

The energy group had also hired Islamic finance specialist Amanie Advisors to advise on how best to position itself in Malaysia’s rapidly growing sukuk market.

Had the issuance gone ahead, the ESB would have become the first Irish company, and one of the non-financials in Europe, to issue a Sharia-compliant bond.

However, the company, perhaps for reasons linked to timing, pricing and the return of relative calm to markets, decided to defer the move indefinitely.

Nonetheless, leaks of the company’s plans reportedly prompted a stream of enquiries from prospective investors, testifying to the appetite for investment in asset-rich companies like the ESB.

The UK’s Islamic Finance Secretariat puts the value of Sharia-compliant assets globally at $1.3 trillion. While this is only a fraction of the global financial system, the market is growing rapidly.

A 2013 report by rating agency Standard & Poor’s predicts global sukuk demand will jump from $240 billion in 2012 to $421 billion by 2016, with demand significantly outstripping supply.

Ireland already commands a disproportionate share of pie when it comes to fund management, with some 20 per cent of Europe’s Sharia-compliant funds domiciled in Dublin’s Irish Finance Services Centre (IFSC).

The Government identified Islamic finance as a "growth opportunity" in its International Finance Services Industry Strategy document 2011-2016, and wants to pitch Dublin as a European hub for the sector.

Keynote address
Last week, the Department of Finance secretary general, John Moran, gave the keynote address at a major Islamic finance conference in Dublin, hosted by Amanie, and attended by some of the most senior figures in the industry.

He spoke of the need for Europe and Ireland “to enter into a new paradigm in terms of financing the economy” and of lessening the over-reliance on banks to fund growth.

“The reputation of Ireland as an international bond issuer has been restored, and the job was now to look at how we can diversify our funding sources by tapping into alternative models of finance.”

Mr Moran said Islamic finance was a key part of the IFSC strategy for the Government, which wanted to showcase Ireland as a place for the Muslim world to invest in and do business with in Europe.

He said the National Treasury Management Agency (NTMA) was “particularly focused” on the possibility of funding the country’s future infrastructural needs through sukuk finance.

“It’s an inevitability that non-bank funding will play a much greater role in terms of how we work this economy.”

Adopting Islamic models of finance could help bolster Ireland Inc’s reputation abroad as well as cement trading ties with countries in the Middle East and Asia, he said.

“As we move the focus of Government away from traditional trading partners, like the UK and the West, and move into other areas, it’s only natural we will then start to build on that in respect of what other financial institutions and models are in operation in parts of the world where traditionally we’ve had a lot less bilateral trade.”

The plan to position Dublin as a hub of Islamic finance faces a formidable challenge from London which is also fast developing

Last month, the British government established the UK's first Islamic finance task force to consolidate London's leading position in the industry.

Double taxation treaties
Ireland's hand is strengthened, however, by an extensive network of double taxation treaties with countries like Malaysia, Singapore and GCC countries.

CIMB-Principal Islamic Asset Management recently chose to base its European Islamic equity funds business in Ireland, principally because there is no double taxation and no withholding tax on interest payments.

Equally, the 2010 and 2012 Finance Bills, introduced significant amendments to facilitate Islamic finance transactions in Ireland, especially the origination and issuance of sukuk.

Mohd Daud Bakar, group chairman of Amanie Advisors and chairman of the Shariah Advisory Council at the central bank of Malaysia, said Ireland had put in place “a very comprehensive framework” to facilitate the issuing of sukuk which puts it ahead of other European countries.

Dr Daud Bakar, who is also a world-renowned Islamic finance scholar, said the Islamic finance industry was young but growing.

It can provide alternative financial instruments for 85-90 per cent of traditional Western investment products, he said.

Because Islamic finance must be linked to “real economic activities”, investment in areas like derivatives or CDS (credit default swaps) is strictly forbidden.

Dr Daud Bakar said the advantage of sukuk financing was that the “funding goes directly to the project, broadening the investor base for the company without diluting its shareholding”.

Dato’ Jamelah Jamaluddin, chief executive of Kuwait Finance House (Berhad, Malaysia), said there was “much untapped liquidity” in the Islamic capital market and that it was up to Western corporations to take the initiative if they wished to access it.

“The Islamic sector remains very liquid with a lot of funds looking for homes whereas the conventional side of the business has dried up significantly.”

She said Ireland had a particular niche in aviation leasing which made the country an attractive sell to Islamic investors.

Another delegate said Ireland’s burgeoning green energy sector was tailor-made for Islamic finance.

Britain cancelled what would have been the first sukuk sale by a Western government in February 2011, saying the pricing did not offer it the expected value for money. Luxembourg ruled out a similar plan later that year on the grounds the government had exceeded its funding target for that year. France has put in place legislation to facilitate a sukuk issuance but has yet to proceed.

It remains to be seen if the NTMA here will take the plunge.