If 2014 was the year of the debut sovereign Sukuk, with the UK and Luxembourg entering the market (as well as Hong Kong and South Africa), in Europe, 2015 has been more about consolidation in the industry. Certainly, there have been eye-catching deals such as the establishment of the first Islamic bank in the eurozone with Germany’s KT Bank and the UK Export Finance (UKEF)’s backing of the US$913 million Sukuk by Emirates, as well as the ongoing development of Halal industries with long-term potential.
KT Bank is a subsidiary of Kuveyt Turk (itself the Turkish subsidiary of Kuwait Finance House) and was launched in July with EUR45 million (US$49.57 million) of capital, half of which is paid up. This is the first Islamic bank in the eurozone and offers products to both retail and corporate customers.
Although it will obviously target Germany’s substantial Muslim population (approximately 4.8 million), its goal is also to use its connections with its Turkish and Kuwaiti parents to facilitate business in Turkey and the Middle East. The bank has also stated its intention to issue a EUR100 million (US$110.16 million) Sukuk by 2017.
For the UK, this year’s biggest deal to date was the US$913 million Sukuk by the Emirates backed by the UKEF. The government announced that the UKEF intended to incorporate a Sukuk guarantee into its standard product range and will actively seek additional Shariah compliant transactions. In particular, the UKEF has demonstrated that it is in a position to provide export credit agency-backing for Sukuk that can be used to fund project finance transactions in the Middle East and elsewhere.
However, despite these headline deals there were fewer flashy developments in the industry that showed the continued progress of Islamic finance in Europe. One such development was the launch through Lloyd’s of London of the Islamic Insurance Association of London (IIAL) in July. Market penetration by Takaful has been slow but steady, and the launch of Cobalt, the world’s first Shariah compliant underwriting agency, in 2014 signaled the intent of London’s insurance market to gain a bigger share of the market. The creation of the IIAL is another component of London’s increasing capacity in this facet of Islamic finance.
Takaful is also steadily gaining ground in France and Germany. The German FWU Group launched a life insurance policy in France, and both the Islamic banking and Takaful sectors in France are becoming increasingly well developed, making this the most exciting time for Islamic finance in France for some years.
Finally, there are intriguing developments in Europe in industries such as Halal food, modest fashion and travel that could stimulate additional growth in Islamic finance. For example, the expansion of Halal food ranges throughout Europe (particularly the UK and Germany) in 2015 recalls the EUR500,000 (US$550,775) Sukuk from Bibars in 2012 in France, and how this growing industry could look to Islamic finance for funding.
Preview of 2016
Although Luxembourg has not had a similarly high profile this year after its sovereign Sukuk launch in 2014, in March its finance minister Pierre Gramegna confirmed that it has plans to issue a second sovereign Sukuk in the first half of 2016. He also said that the license for Eurisbank, an Islamic bank backed by investors in the GCC, is “currently being processed”, which could allow Luxembourg to join Germany and become the second eurozone country to have a fully Islamic bank.
The UK government continues to build on the commitment to Islamic finance demonstrated by its sovereign Sukuk in 2014. On the 30th July, UK Trade & Investment published a groundbreaking brochure setting out 18 selected regeneration projects and explicitly seeking Shariah compliant investment in them, the first such initiative by a G7 or EU country. When combined with the potential of the new UKEF facility to back Sukuk, this could herald interesting developments in 2016 and beyond.
The ‘Cordoba Halal’ initiative in Spain and the rise of Halal travel agencies in the UK and elsewhere also highlight a growing sector which again could look to Islamic finance. An increase in the number of Shariah compliant businesses in European countries can only increase the demand for Islamic finance and create opportunities in the market.
The diversification of Islamic finance in Europe has continued, which is good news for the industry. Although 2015 did not bring a flood of high-profile deals in the wake of the UK and Luxembourg sovereign Sukuk, the governments in both countries have continued the patient groundwork that could yield dividends in 2016.
Elsewhere, the continued growth and diversification of a variety of Shariah compliant businesses suggests that demand for Islamic finance products of all types will increase.