SAMIR ALAMAD shares his insights on the growth and the future of the Islamic wealth management sector in the UK.
The current landscape
The UK retail Islamic finance industry has come a long way since the 1990s, when retail Islamic finance products first appeared in the UK. At the time, the variety was very limited and mainly focused on home finance. However, these products were uncompetitively priced and did not fall within the UK financial regulatory framework.
Things are dramatically different today. According to the CityUK Islamic Finance 2011 report, the UK is the leading western country and Europe’s premier center for Islamic finance. This has been achievable through government recognition of the UK Islamic finance industry along with tax and regulatory changes needed to help it develop. As a result, the UK ranks ninth in the CityUK’s global listings of Islamic financial services markets, based on assets of US$19 billion. There were five Sukuk listings at the London Stock Exchange (LSE) in 2010 and one in early 2011. This brings the aggregate total at the LSE to 31 listings worth US$19 billion. Islamic funds managed in the UK have combined assets of US$300 million.
Also according to the CityUK Islamic Finance 2011 report, there are 22 banks in the UK offering Islamic finance products. This figure exceeds that of any other western country. Five of these are wholly Shariah compliant banks, of which the Islamic Bank of Britain (IBB) is the only retail Islamic bank. The remaining 17 outlets are Islamic finance windows from conventional banks.
Since the IBB’s inception in 2004, when the Financial Services Authority (FSA) granted the bank its licence, the bank has attracted over 50,000 customers and offers the largest range of Shariah compliant retail financial products for the consumer market. Products include current accounts, savings accounts, home purchase plans and buy-to-let-purchase plans. All of the bank’s products offer its customers the standard regulatory consumer protection.
Growth potential
There are a number of factors driving the success of the Islamic finance industry in the UK, such as:
• The 2001 National Census found there were 1.6 million Muslims living in the UK. Muslims are the largest religious group after Christians in the UK and form 52% of the non-Christian religious population. Ten years on and estimates point towards growth of the UK Muslim population. This will be confirmed when the results of the 2011 National Census are revealed later this year and it is expected the figure will have reached 2.2 million. Figures from respected US think-tank the Pew Forum estimate that in 2030 the UK Muslim population will reach 5.6 million.
• A report in 2008 also revealed that 400,000 Muslims in the UK (at that time) held Islamic financial products. The research also showed Muslims in the UK have a combined spending power of GBP21 billion (US$33.3 billion) and save about GBP1 billion (US$1.6 billion) a year.
• Another report published in December 2011 found that the UK mortgage market has yet to show any meaningful signs of recovery since the 2007–09 collapse in gross lending. However, Shariah compliant mortgages have been identified by the report as growing in importance. It finds that the sector has had to deal with financing issues over the last few years (e.g. it is very reliant on retail deposits as money market funding violates Shariah principles), but products have become more competitive, drawing in new customers.
The progress made in the UK is therefore impressive and favorable market conditions exist for the retail Islamic finance sector to continue expanding. In order for this growth to materialize, current providers need to continue pushing the boundaries of product innovation and provide consumers with a wider range of Shariah compliant financial products.
Islamic wealth management
If we look at the overall picture in the UK, the most under-developed area of Shariah compliant product offerings exists in the area of wealth management. At the retail end of the Islamic finance spectrum, Islamic banking products, including home finance and personal savings, are fairly well-developed and widely available. Moving to the other end of the spectrum, corporate finance, in the form of Sukuk, has also taken off with issuances amounting to almost US$50 billion globally in 2010. However, wealth management can be seen as the ‘missing link’ in the UK Islamic finance industry.
Currently consumers interested in managing their wealth in a Shariah compliant way are limited to the Islamic finance equities market. The UK Islamic finance industry has yet to offer a diverse range of Shariah compliant products similar to those on offer from the conventional asset management industry. For this reason, financial planning and investments can often be neglected by UK Muslims.
The global context
The picture is very similar outside the UK. There is an increasing recognition at a global level that Islamic wealth and asset management is a sector that will help propel the Islamic retail banking sector to higher heights.
According to Ernst & Young’s 2011 funds report, looking at the wider asset management industry: “A shift was witnessed in 2010, with the number of new funds launched in alternative asset classes outnumbering traditional types.” However, this optimistic outlook is tempered with the opinion that the industry can only “take off” if the product range is further diversified and more products meet global industry standards.
International commentators also agree that fund products have been heavily weighted towards equities, and to a lesser extent commodities, and therefore do not offer a comprehensive diversification across a wide range of products.
The need to drive product innovation in this area is therefore not just restricted to the UK Islamic finance market.
Setting an example in the UK
While equities still form the cornerstone of Islamic wealth management, the IBB has been pioneering change in this area to offer consumers in the UK more choice.
In June 2011, the IBB announced it was working together with Pointon York, a specialist self-invested personal pension (SIPP) administrator, to offer a range of SIPPs accredited as Shariah compliant by the IBB.
The launch of Shariah compliant SIPPs opens the door for UK Muslims wishing to save for their retirement. It also offers employers and Muslim employees the ability to comply with the impending auto-enrolment initiative without the concern that their pension is not permissible according to the rules of Islam.
Preceding the above product launches, the IBB joined forces with Radcliffe & Newlands, a financial planning firm, in 2010, to launch the UK’s only dedicated Shariah compliant wealth advisory service. The service offers consumers advice on how they can manage their wealth with investment products that are 100% Shariah compliant. This helps consumers really understand the world of Islamic investments and wealth management and makes it more accessible to them.
Realizing the potential
Growth of the Islamic wealth management sector in the UK is therefore in progress, with key players such as the IBB pioneering new ways for consumers to generate a profit from their wealth in a Shariah compliant way.
However, the challenge doesn’t end here. Whilst product innovation needs to keep pushing the boundaries, consumer education and awareness must also be increased to drive product take-up. The industry’s success so far proves that this is not mission impossible.
Samir Alamad is the senior manager of Shariah compliance and product development at the Islamic Bank of Britain. He can be contacted at
[email protected]
.