Last year, Britain became the first country outside the Muslim world to issue Sukuk which attracted investor interest. It was another step in encouraging wider investment from the global Islamic finance industry to the City of London. As a consequence, the UK continues to secure its position as the leading Western center for Islamic finance.
Review of 2015
London remains a safe haven for property investors because of the strong support from its supply and demand characteristics and this looks set to continue. There are an increasing number of major projects that have been announced this year in London, the UK and Europe which are backed by Middle Eastern and Islamic investors. There is also a clear increase in the number of conventional and non-Muslim clients utilizing Islamic finance. Conventional borrowers are seen to be more readily considering Shariah compliant financing structures and this is driven by the need to widen their financing sources as well as the need of investors.
The UK government and the UK Export Finance had underwritten its first Islamic bond, a further sign of London’s growing role in the global market for Shariah compliant debt. The government-backed export credit agency (ECA) provides cover for a GBP617 million (US$936.95 million) Islamic bond issued by Dubai’s Emirates Airline to purchase aircraft including the Airbus A380. This marks the first example of a Sukuk sold in the debt capital markets to be backed by an export credit agency. It is also the first time a Sukuk has been used to pre-fund the sale of aircraft, and the largest capital market offering of any kind for aviation to carry an ECA guarantee. This has widened options for buyers of UK exports and boosted the UK’s aspiration to become the leading Western hub for Islamic finance.
The first Shariah compliant pre-delivery payment (PDP) helicopter financing deal was concluded by the Bank of London and the Middle East (BLME) who participated as the Islamic financing party. The deal allows LCI Helicopters to complete the world’s first secured helicopter PDP funding under an Islamic finance structure. The innovative multi-year financing arrangement covers approximately US$250 million worth of Airbus helicopter assets.
The Islamic Insurance Association of London was launched to support and develop the UK insurance and reinsurance markets that conduct business in the Islamic finance industry. The intention is to drive and develop principles for the Shariah compliant commercial insurance and reinsurance business and this is part of the broader aim to become the hub for Islamic insurance in the west. This year also saw XL Group and Cobalt Underwriting launching their first Shariah compliant product which is available through Lloyd’s of London. The demand for Shariah compliant options when it comes to insurance is expected to grow and it is believed that the London market has a major opportunity to deliver real value to Islamic investors and insurance clients.
The UK Trade & Investment Department continues to develop initiatives to increase new opportunities in the Islamic finance space and there is a focus on Shariah compliant UK regeneration project developments. The developments selected contribute to the regeneration and renewal of properties in towns and cities in the UK. This has been supported by the UK Regeneration Investment Organization to include developments where the project and finance structure can be raised through Shariah compliant options.
Preview of 2016
Private banking and wealth management is an area that is set to expand in the UK. Several Islamic banks in the UK have played a role in developing this area and these initiatives tend to focus on the real estate sector. BLME in partnership with Bank Muamalat in Malaysia have plans to further develop their private banking services. Al Rayan Bank has also announced the intention to enhance its services in private banking for its clients. Several residential property funds have also been established which represent a pioneering step forward for the Islamic wealth management sector in the UK.
It is expected that there will be changes in the residential property market based on proposed changes in the UK budget to the treatment of non-domiciled residents. Although it is still unclear what the implications would be, it is anticipated that this may have an impact on the property market and might encourage investors to consider more commercial assets, given the tax attraction.
With the Islamic finance industry poised for continued growth, the UK is well positioned as the primary western hub for its development. The ethically based foundations of Islamic finance appeal to both Muslims wishing to adhere to their faith and conventional/non-Muslims drawn to the underlying benefits. The UK’s involvement in developing this niche sector can certainly spur economic growth and key financial prospects in the future. This past year has seen an increase in the participation of the UK in Islamic financial services and this trend is set to continue in the years ahead.
Fara Mohammad is the director of Islamic finance at Foot Anstey. She can be contacted at [email protected].