Growing demand by UK banks for Islamic finance

October 22, 2017
A view of the City of London financial district, seen from St Paul\'s Cathedral in London. (Reuters)

LONDON - The main benefits of sharia-compliant banking are low risk and high investment, which are imperative in the economic climate in Britain as the country battles to remain “strong and stable” post Brexit vote. British Foreign Minister Boris Johnson unveiled his vision on Brexit without consulting Prime Minister Theresa May and the party infighting reflects how unstable Britain’s position is on Europe.
The cost of Brexit to British firms is estimated at $5.3 billion a year, which would trigger enormous dis­ruption and competitive pressures. Brexit is damaging the economy and there is a warning that Britain may lose 40,000 jobs in investment banking unless a better deal is of­fered. Declining real estate prices and the depreciation of the pound represents the drop in business con­fidence. The question is whether the United Kingdom will be able to retain its role as the leader in Eu­rope’s financial powerhouse.
London is a captive market for Islamic finance. The London stock exchange has 65 Islamic bonds listed with issuances totalling $48 billion. Miles Celic from TheCityUK said: “Islamic finance institutions and Muslim investors specifically use the UK as an investment base, rather than considering the UK as a gateway to the rest of the EU.”
A CityUK report titled “Global trends in Islamic finance and the UK market” indicated there are more banks in the United Kingdom offer­ing Islamic financial banking than any other Western country. Twenty UK banks — five that are considered fully sharia compliant — offer Islam­ic finance. That is double the num­ber in the United States.
One option for the United King­dom to facilitate growth is to en­hance its unique position of being the first country outside the Islamic world to hold a sukuk. The bond was oversubscribed and orders totalled more than $3 billion from domestic and international financial institu­tions. Malaysia has dominated the global sukuk market. Its success is based on tangible assets rather than speculation on unknown fi­nancial instruments. The compre­hensive regulatory infrastructure underpinned by sharia framework has been critical to the Malaysian growth model.
Zeeshan Uppal, from Yielders, Britain’s first sharia-certified fintech company, said London could be­come a centre for Islamic finance. He said that, although the lion’s share is in the Middle East and Far East Asia, there is ample opportunity based on institutional level investment, with several banks offering Islamic fi­nance, an indication that the indus­try is growing in Europe. He said the United Kingdom is poised to lead the continued growth.
Many analysts say there is no dif­ference between the structure of modern Islamic banking and the secular variety. Tarek el-Diwany, senior director at Kreatoc Zest, said: “Both systems are capable of crash­ing and both tend to increase wealth inequality over time.”
Key developments in London supported by sharia-compliant fi­nancings, such as Chelsea Barracks, Olympic Village, Shard and the Battersea Power Station sites, indi­cate that the industry is growing. However, funding of projects using Islamic financing is not London-centric. A pitch book of 18 regenera­tion projects was announced in 2015 to regenerate the country North to South.
Diwany said the United Kingdom was more attractive than other Eu­ropean markets due to British regu­lators and financial institutions be­ing the first in the West to recognise the opportunities. He said that is due to the United Kingdom being involved at the initial stage of the Islamic banking and finance experi­ment.
The United Kingdom influenced the direction of development, Di­wany noted, saying “not everybody thinks their influence was benign.”
There has been a critique of over­stating the growth level of Islamic fi­nancial assets, which account for 2% of global finance. Mahmoud el-Ga­mal, chairman of Islamic Econom­ics at Rice University’s economics department, said: “Islamic finance merely replicates what is already available albeit inefficiently.”
Islamic finance has been accused of being incapable of solving practi­cal problems due to its focus on cul­tural identity, which is regarded as an effective marketing ploy but cre­ates unnecessary transaction costs.
Diwany said it would be helpful for Western countries if Islamic in­stitutions “didn’t go so heavy on the Islamic and cultural language.” He pointed out that it is important to delve deeper to “determine what is beneath the mask.” He said this was possible by creating financial prod­ucts that are marketed effectively to a larger demographic and would increase growth.
Uppal said: “We created Yielders to democratise finance, provide a community with the confidence to invest with very little and receive a good return.”
Some convergence is required with Brexit but the United Kingdom is hungry for alternatives. Islamic finance is a young entity but it may be a viable alternative in creating es­sential fiscal confidence.
As the demand for Islamic finance grows in London, bankers hope the government does not introduce leg­islation that affects sharia financing; otherwise, the future remains un­certain.