London is keen to establish itself as the key Western center of choice for Islamic finance, complementing services provided by countries such as Malaysia, Iran, Saudi Arabia and the Gulf states that have led the way in the development of Islamic finance.
The global market for Islamic financial services, as measured by Shariah compliant assets, was estimated by IFSL (International Financial Services, London) to have reached US$531 billion at end-2006, having grown by over 10% a year since the mid-1990s. Islamic commercial banks accounted for 75% of the assets, and investment banks 13%. The balance is made up by Sukuk issues; assets of Takaful providers; equity funds and other off-balance sheet investments. Standard & Poor’s has estimated that the potential market for Islamic finance could be $4 trillion, over seven times its current size.
Assets that can be allocated to individual countries from The Banker’s survey of 500 organizations reveal that the leading countries for Shariah compliant assets are Iran, Saudi Arabia, other Gulf states and Malaysia, but the UK, in 9th place, is the leading Western country with $10 billion of reported assets, largely based on HSBC Amanah.
London has been providing Islamic financial services for 30 years, although it is only in recent years that this service has begun to receive a greater profile. A key feature of the development of London and the UK as the Western center for Islamic finance has been government policies intended to broaden the market for Islamic products for both Shariah compliant institutions and firms with Islamic windows.
Government policy has been increasingly supportive of Islamic finance because it has been seen to contribute to broader government objectives such as combating social exclusion and promoting London and the wider UK as a global financial center. While a number of Western countries, including the US, Germany, France and the UK, have indigenous Muslim populations of between one and five million, it is the UK that has been at the forefront in creating the framework in which Islamic services could be provided to these communities.
Since 2003, an enabling fiscal and regulatory framework for Islamic finance has been established in the UK. There have been a number of initiatives which are intended to form part of a continuing process. In 2003 double tax on Islamic mortgages was removed and tax relief on Islamic mortgages was extended to companies as well as individuals. The Islamic mortgage market is now worth over GBP500 million (US$929.1 million) and the UK’s Shariah compliant banks have more than 40,000 customers.
Reforms have also been made to the arrangements for issues of bonds so that returns and income payments can be treated ‘as if’ interest, making London a more attractive location for issuing and trading Sukuk. The Financial Services Authority has also sought to ensure that the regulatory treatment of Islamic finance is consistent with its statutory objectives and principles.
The government is also working on the possibility a sovereign Sukuk. If all the barriers can be addressed it intends to issue a rolling program of up to around GBP2 billion (US$3.7 billion) of government Sukuk. The government in 2008 also announced a new strategy for Islamic finance. A new report to be published by the end of the year will review the short and long term barriers to developing Islamic finance and how these can be addressed. Working closely with industry practitioners, this review will focus on five key issues: tax, regulation, standardization, awareness and skills.
The six fully Shariah compliant firms to have been established so far in the UK place the country in the lead in Western Europe. The Islamic Bank of Britain became the first stand-alone retail Islamic bank in the country.
European Islamic Investment Bank, AIM-listed in 2006, was created with the aim of recycling surplus institutional and private liquidity from the Gulf into Shariah compliant asset classes in Western markets. Opening in 2007, the Bank of London and The Middle East offers Shariah compliant investment and corporate banking to businesses and high net-worth individuals globally.
European Finance House, a unit of Qatar Islamic Bank, and Gatehouse each received a banking license in 2008, along with Principle Insurance. European Finance House offers a balanced range of Shariah compliant investment products and services to clients that include companies and wealthy investors. Gatehouse is a wholesale investment bank operating in capital markets, institutional wealth management, Treasury business and advisory services.
In addition to the five Shariah compliant banks, there are around 20 conventional banks that have set up units to provide Islamic financial services. These include Arab Banking Corporation, Barclays Bank, BNP Paribas, Deutsche Bank, HSBC Amanah, Lloyds TSB and UBS.
Global issuance of Sukuk has grown rapidly to reach US$40 billion in 2007. Only a quarter of Sukuk are listed, with the remainder being over the counter. Dubai is the main center for listings followed by London, where at least eight Sukuk have been listed. Turnover in the secondary market in London was estimated at US$2 billion a month in 2007.
The UK is also an emerging market for equity funds. Out of 71 managers of equity funds identified by Failaka International, nine were based in the UK.
For example, iShares has launched three tracker funds — World Islamic, Emerging Markets Islamic and USA Islamic — on the London Stock Exchange. These Exchange Traded Funds (ETFs) will allow Muslim investors to track markets in accordance with Islamic law.
The Takaful market in the UK is at an early stage of development. Principle Insurance, authorized by the FSA in 2008, is the first Shariah compliant independent Takaful company in the UK. Its services to British residents include Shariah compliant motor and home insurance. Prudential plc was given approval in 2006 to launch a Takaful business in Malaysia.
A number of major law firms in the UK, including Allen & Overy, Clifford Chance, Eversheds, Denton Wilde Sapte (Dentons), Norton Rose and Trowers and Hamlin, are active in Islamic finance. The UK has a successful record as a trading center for Islamic products as commodity-based Murabahah agreements based on contracts at the London Metal Exchange are traded daily off-exchange. This has for years been a key mechanism for Islamic financial institutions to manage their assets and liabilities.
The outcome of both government initiatives and private sector response to market opportunities is reflected in the establishment of various aspects of Islamic finance in the UK.
In summary, the UK offering includes six Shariah compliant firms and, in total, around 25 banks supplying Islamic financial services. Nine fund managers provide the opportunity to invest in 10 funds. The secondary market in Sukuk in London was estimated at US$2 billion a month in 2007.
There is a growing market for retail mortgage and insurance business and the development of legal expertise. A variety of educational and training products in Islamic finance have been launched by professional institutions, universities, business schools and other training providers. For example, the Securities and Investment Institute, the Chartered Institute of Management Accountants and the Cass Business School have each partnered with other organizations to offer Islamic qualifications.
Director of Economics
International Financial Services London (IFSL)
[email protected]
www.ifsl.org.uk
IFSL’s role in promoting London as a center for Islamic finance IFSL works with its private sector members and partners in government to ensure that London’s potential is fulfilled. To this end, the publication in 2008 of IFSL’s first report on Islamic finance represents an important start. More widely, the process of establishing London as the Western center of choice in the growing market for Islamic finance is central to IFSL’s remit of promoting expertise of UK financial services around the world. |
Islamic finance qualifications provided in the UKUK organizations have collaborated with other institutions to provide qualifications in Islamic finance that can be accessed internationally:
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