Can the UK maintain its position as a leader in Islamic finance in 2023? The UK has an impressive depth of knowledge in Islamic finance which is exported around the world. October saw a combined effort between the Bahrain Institute of Banking and Finance and Coventry University around Islamic fintechs for example, in addition to very well-attended conferences in September which attracted people from all over the world.
However, 2022 has not been a good year and 2023 looks challenging despite the fact that the UK remains firmly embedded as a ‘go to’ destination for Islamic finance.
Review of 2022
Looking back, a helicopter view may provide some insight as to the challenges ahead.
By the time this comes to print, who knows what the government will look like. Among the turmoil, there has been no room for the much-needed amendments to the Finance Act (to equalize the treatment of new Islamic P2P within the ISA and IFISA regime) let alone discussions around fair options for Shariah compliant pensions. All this despite the post-COP26 [2021 United Nations Climate Change Conference] discussions about ethics and SDGs which fit so neatly within the existing Islamic finance system.
ESG stays high on the agenda
Following from COP26, the CityUK and others have done an excellent job in promoting the importance of ESG and Islamic finance in an attempt not only to bring value to the Islamic finance community but also to try to attract the deeper pools of conventional capital. Education is key for both sides as there are still gaps in the understanding between conventional and Islamic finance but this appears to be narrowing; UK pension publications have been publishing articles about Islamic finance.
Consumer shortcomings remain
From a retail perspective, it is at least two steps backwards. Notable losses on the consumer landscape are Al Rayan closing its high-street branches, Rizq having to close accounts because of ‘risk factors’ and Wahed’s SEC fine which all do nothing to help the business case for potential UK Islamic fintechs. The Halal industry continues to grow however and perhaps it is only through the provision of basic consumer goods and services that Islamic consumers will benefit.
Retail consumers’ problems aside, for private investors (including institutions), the UK real estate market continues to attract capital from all over the world. Yields have fallen to as low as 2.5–3.5% but with the sterling’s weakness, there are short-term opportunities for cash-rich investors. UK real estate remains a gold standard asset class but inflation and non-zero interest rates will create challenges for commercial and residential investments.
Preview of 2023
With the possibility of an election in 2023, it may be encouraging to think that the pension legislation changes may find a way into a political party’s manifesto. Millions do not have the same choices as conventional savers; although this may be a cheap tactic to garner votes, it is a problem which impacts millions of voters.
Green vs. ESG
The focus should shift from ESG to impact and green opportunities. The scale of investments needed for ‘energy freedom’ will be enormous. A green Sukuk facility from a UK issuer in areas like battery storage and hydrogen (as the new future green stars) is likely. The UK may look politically shaky but quality energy off-takers makes green Sukuk possibly the ‘next big thing’.
Consumer financial choice remains limited
Will we see improvement in 2023 without a decent business case (or success story)? Will a bank or insurance company take steps to advance the situation for the millions of potential Shariah compliant financial consumers? Unlikely. Fintechs will push for market share and one or two new discretionary management offerings are in the market but these are targeted to high-net-worth individuals. Retail success seems elusive and likely to remain so.
Debt-free companies will fare better than debt-heavy companies caught between rising interest costs and the pressure of inflation. This will create opportunities for those looking to invest in traditionally attractive sectors like care homes. Social housing may return to the investment landscape; yields are above 5% (and inflation-linked) in most of the country (even London) and, coupled with impact investing, could offer attractive, sustainable returns.
The UK remains strong for the knowledge economy but bad for consumers. Government initiatives which started strong in 2021 have faded in the political chaos and this will not change quickly until the ‘house is in order’.
The King has strong interfaith and sustainability views and we hope these are hallmarks of his reign but that will take time.
The reality is that London will remain popular with Islamic investors; billions of pounds will continue to flow into real estate deals, hopefully with less focus on trophy assets and more on impact investing. Stable or uncertain? Risky or safe haven? In many respects, 2023 will demonstrate the UK could be, at the same time, both.