Islamic finance has developed rapidly in the UK over the past decade and the UK government has been very supportive toward its development and promotion. The UK hosted the first stand-alone Islamic financial institution in the EU and has the highest value of Shariah compliant assets of any non-Muslim country. The UK has a strong and proud tradition of openness and flexibility which provides a strong foundation for growth when combined with London’s position as a leading international financial center and the UK’s significant Muslim population (just under 5% of the UK population according to the 2011 Census). As a result of its standing, London has long been perceived as the western hub for Islamic finance.
Review of 2016
The UK’s vote to leave the EU in 2016 and new banking regulations, such as the implementation of the Bank Recovery and Resolution Directive (Directive 2014/59/EU), affected the way in which Islamic finance transactions were structured in the UK in 2016. More generally, the geopolitical and economic circumstances (including the fall in the oil price) presented both a challenge and an opportunity for Islamic finance as Middle Eastern oil-exporting countries (who have been a key driver of the global Islamic finance industry, and who are also likely to have been the most affected by the decline in the oil price) re-assessed their balance sheets, and equally searched for alternative sources of finance, including Islamic finance, to maintain their ambitious capital-spending programs.
Against this backdrop, Islamic finance continued to play a significant role in the infrastructure, real estate and retail banking sectors in the UK. The UK is currently the number one foreign investment destination in Europe with net inflows of US$72 billion and around US$185 billion in foreign property investment alone. The fall in UK real estate values and the low pound to US dollar exchange rate following Brexit have presented buying opportunities for those looking to invest in the mid to longer term and dissuaded more cautious buyers. This is particularly attractive for Middle Eastern investors with a US dollar-denominated currency.
Preview of 2017
The UK Trade & Investment Department continues to develop initiatives to increase new opportunities in the Islamic finance sector, and this is set to continue in 2017. Sovereign wealth funds from Islamic countries are also expected to remain active in the UK in 2017.
The mandate of the Islamic Finance Task Force is to facilitate Islamic financial business, including investment in UK infrastructure by Islamic sovereign wealth funds. 2017 may see a surge in Sukuk issuance by Middle Eastern sovereigns (including those listed on the London Stock Exchange) to support their ambitious capital-spending programs in a low oil price environment.
The UK government believes that the growth of Islamic finance in the UK is beneficial to all UK citizens and that Islamic finance should be available to everybody. On the retail side, all consumers gain from a wider choice of retail financial services, in particular those consumers whose religious beliefs prevent them from accessing conventional finance. On the wholesale side, the entire country benefits from the UK financial services industry’s success as the leading western center for Islamic finance. The UK’s prominent position in the Islamic finance market looks set to be maintained (and potentially enhanced) by Brexit. Many of the fundamentals to doing business in the UK have not changed, and the UK government is showing a willingness to expand its horizons to attract the investment that the UK needs.