Islamic finance in the UK

The UK Islamic finance industry has developed progressively over the years. This has not been without challenges, and the impact of Brexit and the COVID-19 pandemic has created uncertainties. Like their conventional peers, the economic risks that Islamic banks share are similar, and the environment in which Islamic finance operates is expected to become smaller, particularly as a result of Brexit.

Nonetheless, it is reassuring that UK domestic Islamic banks such as Gatehouse Bank, Bank of London and the Middle East, and Al Rayan Bank have said that there has been limited implications on their business to date. This is because their business in the UK is focussed on real estate and savings.

The influx of investors wanting to invest in UK real estate has not been significantly affected by COVID-19 or Brexit, as real estate continues to be at the forefront in attracting Shariah-compliant foreign investment into the UK. This means that there has been a steady trail of investments from the Middle East and the Far East.

In this article, Islamic banking and finance partner Fara Mohammad discusses the developments in Islamic finance in the UK.

Alternative liquidity facility for Islamic banks

A significant development in the UK Islamic finance space is the announcement by the Bank of England with regard to the development of an alternative liquidity facility. This facility will provide the opportunity for UK Islamic banks to make investments in Shariah-compliant high-quality, liquid assets and thus enable the banks to hold reserves and assets in a Shariah-compliant manner.

This facility has been long awaited as there had been limited resources available for Islamic banks to invest in Shariah-compliant assets. This facility will provide an avenue for UK banks to manage their treasury management and liquidity in a more diverse manner. This is also seen as another attempt to level the playing field with conventional banking.

UK issues second sovereign sukuk

The UK has issued its second sovereign sukuk (Islamic bond) in 2021. The sukuk of £500 million was sold to a broad range of institutional investors based in the UK and in the major hubs for Islamic finance in the Middle East and Asia. This second sukuk offering is more than double the size of the UK’s first issuance in 2014. This has increased the supply of high-quality Sharia-compliant, liquid assets to the market and further supported the development of Islamic finance in the UK. The UK’s first sukuk which was a £200 million note was also heavily subscribed and made the UK become the first western country to issue a sovereign sukuk.

Although there is little sukuk activity in the UK amongst the corporate community, there have been a few issuances. In 2015, the UK Secretary of State (acting by the Export Credits Guarantee Department and operating as UK Export Finance) guaranteed a sukuk to finance the acquisition of four new Airbus aircraft. This was the world’s first sukuk supported by an export credit agency. Al Rayan Bank issued a debut £250 million sukuk in 2018. Other UK corporate issuances included Al Waseelah which issued a US$50 million sukuk in 2019. This provides an alternative financing solution to corporates and institutions and provides investors with access to a broader range of Shariah-compliant investments and assets in the UK.

Islamic insurance

Takaful (Islamic insurance) is a product that has long been seen as an area with great potential. It is reported by Insurance Business UK that the UK market now has up to 10 commercial insurers offering Shariah-compliant products, ranging from political risk insurance to risk-sharing mechanisms in UK infrastructure projects backed by Islamic finance. This is supported by company members of IUA and Lloyd’s syndicates.

Nonetheless, this continues to be an area for growth and demand, as London houses established insurance players that can tap into the insurance and re-insurance area. Friendly societies and other mutual insurance companies are potential vehicles that can provide takaful and re-takaful.

Asset management

Asset management is another underserved area where there is a growing interest in establishing Islamic funds. Schroders recently launched a Shariah-compliant fund in 2020, which is part of their broader presence in Islamic markets. This fund will give investors access to a diversified Shariah-compliant portfolio of equity. There is also scope for other large institutional UK asset managers to establish Islamic funds, in various asset classes and industries. Other Islamic asset managers in the UK include the dedicated desks at the UK Islamic banks, Oasis Crescent, Arabesque, and TAM Asset Management.

Islamic Fintech

Islamic fintech is arguably the area which has received the most attention recently in Islamic finance. As the UK is now home to more than 27 Islamic fintechs, London has therefore enhanced its unique position as a finance and technology hub which is suitably placed to capitalise on the domestic and global demand for Islamic finance. This encourages the UK’s Islamic finance economy and customers to benefit from London’s dominance in the world of fintech.

Future trends in Islamic finance in London

It is anticipated by S&P Global Ratings in a new report that the global Islamic finance industry will slow down in 2020–2021after its strong performance in 2019, which was largely centred on the developments occurring in the sukuk market. This is significantly due to the slowdown in core Islamic finance economies in 2020 and the measures implemented by various governments to contain the COVID-19 pandemic. Nonetheless, several opportunities that have been identified include:

1. the development of social instruments that can help the industry such as social sukuk and waqf (endowment) initiatives;
2. the leveraging of technology and creating a more robust Islamic finance industry with a focus on higher digitalisation and fintech collaboration; and
3. the focus on sustainable growth opportunities by fostering its underlying key principles such as fairness, equity, and transparency. It is anticipated that there may be more frequent issuance of dedicated social and green Islamic finance instruments as the industry fosters an alignment with environmental, social and governance values.