By Lionel Laurent, Forbes.com
Like several of its Gulf neighbours, Dubai has benefited from government support for Islamic finance, a favourable regulatory environment and strong domestic ties to Islam and Shariah. It has more listed sukuk, than anywhere else. What's more, Dubai is cosmopolitan and business-friendly enough to lure talent from far afield.
'Lawyers and banks are moving to Dubai,' says Darshan Bijur, director of auditor KPMG's Islamic finance division, adding that skilled staff are attracted by the emirate's tax-free charms. 'They have established a very high-quality regulatory system in the Dubai Financial Centre,' says Bijur. In Pictures: Islamic banking capitalsIn Pictures: How To Make Money In The Middle EastIn Pictures: The Middle East's 40 Largest Public Companies In Pictures: World's Billionaires 2008In Pictures: The Middle East's 20 Richest
Dubai's attractions are many: In addition to glitzy shopping malls, it boasts numerous free zones, which allow for 100% foreign ownership, 100% repatriation of capital and profits, exemption from corporate tax and no import duties.
Dubai will continue to be a major driver for Islamic finance in the near term, as it attempts to recycle the region's petroleum wealth into real estate, tourism, technology and other anchors of a truly diversified economy.
But its central role in Islamic finance isn't assured over the long haul. The UAE's dollar-pegged currency and booming economy are pushing inflation to dizzying levels.
Merrill Lynch said in January that inflation in the UAE would grow to 12% in 2008, up from 10% in 2007, unless big changes to monetary policy were forthcoming.
The rise in costs could tempt businesses to hubs like Bahrain. Industry insiders say the small island kingdom, which had an inflation rate of 4.6% in 2007, is a cheaper alternative.
While the Islamic finance market was once a local affair, deeply rooted in the Gulf, now even Europe is getting in on the act.
The British government has voiced its determination to issue a sukuk, and the finance ministry is working to complete the necessary regulatory changes by next year.
The German state of Lower Saxony issued its own sukuk bond back in 2004 - the first European government to do so. The state hoped to attract more investment from the Middle East. It met its target of raising 100 million euros, but has not issued another sukuk since.
Even some highly unlikely contenders want a piece of the lucrative industry.
Malaysia has been strong in the market for the past decade, but now Asian countries with tiny Muslim populations are also looking to participate.
Japan wants to be the first nation in the G-7 to issue a sovereign sukuk bond - that is, if Britain doesn't get there first.
And Hong Kong Chief Executive Donald Tsang has said that he wants to develop an Islamic bond market in 2008, in order to boost the region's global financial standing.
London leads race to be Shariah capital
Among cities outside the Muslim world, London is the strongest Islamic finance centre.
'I think London will give Malaysia and the rest of the Islamic world a run for its money,' said Mark Toh, chief executive of Prudential's fund management business in Malaysia.
He believes London has all the strengths of a traditional financial centre, from a solid infrastructure to a qualified pool of prospective employees. Singapore, also seeking to attract Islamic capital, has the same lures but to a lesser degree.
London is already enjoying some success as a focal point for international Shariah-compliant investors, with both corporations and countries listing sukuk bonds in Britain.
London is also benefiting from New York's relative indifference to Islamic finance, which removes from the race a long-standing rival for global capital.
Analysts at Standard & Poor's have argued that America's financial capital has a narrower appetite for Islamic assets than other centres.
So far New York investors have shown an interest in Shariah-compliant equities, but not in Islamic bonds or in takaful, which is Islamic insurance.
One reason for New York's low interest level: European and Asian governments have been eager to change regulations to adapt to and attract Islamic finance – Britain, for example, struck down a law that double-taxed homebuyers who used a murabaha, a two-part Islamic financing structure, rather than a mortgage.
The US government, on the other hand, has shown little interest in chasing domestic or international investment in Shariah-compliant products.
That's not slowing down the rest of the world. With governments eager to grab a piece of the Islamic finance action, we can expect the competition to intensify over the next year.See also:Listen: Noor Bank launches service for the 'unbankables'Listen: Islamic finance outstripping market growthThe rise of Islamic finance