DUBAI - When the British government said last month it would issue its first Islamic bond, the implications went far beyond the debt market: it was a signal that London will not back down in an escalating tussle among cities for Islamic financial business.
London has long been the default centre for international firms to issue sharia-compliant bonds, part of a fast-growing Islamic finance sector that will be worth $2 trillion globally next year, according to consultants Ernst and Young.
But it faces a mounting challenge from two centres: Dubai and Kuala Lumpur.
Dubai, at the heart of the wealthy Gulf, announced a push into Islamic finance this year. It has an entrepreneurial culture which has already made it the Middle East's top conventional banking centre, and big state-run firms which can be expected to support the government's strategy.
The Malaysian capital has a reputation for efficient regulation of Islamic finance and a huge domestic market for local-currency Islamic bonds, which is now starting to attract foreign issuers.
The final result of the three cities' rivalry may not be known for years, but thousands of jobs and large amounts of direct investment in companies and real estate are likely to depend on the outcome.
"You need a critical mass of borrowers and investors," said Khalid Howladar, senior credit officer at Moody's Investors Service. "You have multiple centres that are looking to establish their pre-eminence in the Islamic space."
Islamic banking, which obeys religious principles such as bans on interest and pure monetary speculation, is still dwarfed by conventional banking with over $100 trillion of assets.
But the top 20 Islamic banks have been growing 16 per cent annually in the last three years, far outpacing their conventional rivals, according to Ernst and Young. That makes Islamic finance tempting for many non-Muslim institutions.
In an unstable global market environment, the conservatism of Islamic financial structures may be helping the industry. Its access to big pools of Islamic investment funds in the Gulf oil-producing states and southeast Asia is certainly a factor.
Over the past year, the industry has been expanding from its traditional bases in those two regions across many nations with significant Muslim populations, from North Africa and Kazakhstan to Nigeria and Djibouti. European financial firms have tapped Islamic funds by issuing sharia-compliant bonds, known as sukuk.
That promises big rewards for the financial centres which arrange issues of sukuk and other Islamic products, employ the experts who structure them, and host the scholars who vet them for religious permissibility.
"The pent-up demand for short-term papers to manage liquidity in Islamic finance is huge, and to meet this will require other market players to come in," Malaysia's central bank governor Zeti Akhtar Aziz told Reuters.
Dubai laid claim to such business in January this year when its ruler, Sheikh Mohammed bin Rashid al-Maktoum, announced a drive to develop the emirate as an Islamic financial centre.
Its main competitors responded. In March, Britain launched a publicity campaign involving government junior ministers and private sector executives to burnish London's Islamic credentials.
In May and June, Malaysia took steps to strengthen its regulation of the industry while making it easier for its Islamic insurers to invest their money overseas.