How to summarize Islamic finance in the UK in 2021? “May you live in interesting times” — this oft-repeated phrase is actually a curse not a blessing although to be fair no one wants to be bored. 2021 was certainly not boring but will the interest generated actually be a blessing (just to prove the supposedly Chinese-derived phrase wrong)?

Looking back over some of the major themes which have emerged throughout the year in roadshows, conferences, seminars and in the media, the UK does indeed sit in a unique position in the market. For a non-Islamic country, the depth of knowledge, support and advice which comes from the Islamic finance industry and is exported around the world is impressive.

There are a number of ‘household’ names which bring this expertise to the market, from International Islamic Financial Market (IIFM) and AAOIFI involvement through advising emerging Islamic economies down to opening offices in a diverse market to build out the breadth of solutions open to Islamic institutions and investors around the world.

Review of 2021
To evaluate the activities in the UK in 2021 and to look forward, some convenient categories have been considered which look at different aspects of the deep and varied Islamic finance landscape in the UK.

The government
At the very top, in other words Her Majesty’s Government, the sophomore Sukuk and the announcement of the Bank of England Alternative Liquidity Facility were both much applauded announcements. That being said, we are still waiting for guidance on the liquidity facility and how it will operate. My personal concern is that the lack of available instruments in the market will not really help the UK banks unless the facility is extended down to unrated instruments which is highly unlikely given the limitations on the rules for conventional banks. The government’s Sukuk could have done better; with COP26 [2021 United Nations Climate Change Conference] in Glasgow, it would have been nice if the sophomore Sukuk had a more environmental, social and governance (ESG) flavor to it rather than just cheap financing.

The start of ESG crossover
The trend for ESG considerations in conventional investors has been grabbed by the entire Islamic finance industry from the IIFM down. TheCityUK has done an excellent job in promoting the synergies between conventional and Shariah compliant structures. This drive to educate the industry players and bring the discussions around to align the more conventional investors with what is happening in Islamic finance could provide for more conventional investors to access what are inherently ethical structures (and totally aligned with Shariah compliance).

Consumer shortcoming remains
From a retail perspective, the Islamic finance industry has a long way to go. Not good news with the potential closure of a student finance facility and no real solution on the horizon for the pensions market (currently dominated by HSBC Amanah Global Equity tracker). Savers in the UK need a broader range of options for their ISA portfolios as well as a broader range of funds to achieve the lifestyle which is mandated by the Financial Conduct Authority for proper financial advice.

Innovation and investment
The pace of innovation certainly increased with the UK taking a global lead in fintech solutions (thank you IFN Fintech landscape). The market opening of a range of new businesses including permissions for neobanks, expansion into the UK market, new offerings for Shariah compliant non-bank investment platforms and the efforts to raise the awareness of Islamic finance issues are all positive steps driven from the ground up. To give a shout out to all the entrepreneurs behind these initiatives runs the risk of ignoring a few.

Preview of 2022
Following the same thematic review for 2021, what might 2022 bring across these important areas of consideration?

Government initiatives
Extensive effort will be laid down to create the framework to deliver the recently announced government green Sukuk. This will take far too long to appear (based on the recent track record) but much discussion and work and money will be spent working out how to deliver on this promise.

In light of COP26, it is nice to see forward-looking efforts by the government; the priority should be resolving the workings of the liquidity facility so that the Islamic banks in the UK can do more to compete for retail clients. 2022 should also see clarification of the innovative finance ISA rules, encouraging more Shariah compliant pension or tax efficient savings options.

This will most likely be led by one or two entrepreneurs who will test the waters in this regard leading to further equalization (and clarification) of the meaning of alternative finance instruments (how Shariah compliant products are defined in the Finance Acts).

Narrowing the ESG gap
2022 may show more of a focus on GSE (rather than just ESG) as it will be easier to identify opportunities which are driven by good governance and ethical practices to create sustainable businesses rather than just ‘green-led’. The principles of “do no harm” embedded within Islamic finance and the increasing focus on the future of the planet could potentially mean that in 2022 we will see more ‘crossover’ investors.

The industry should recognize this and the work done in the UK around ‘delabelization’ to align the discussion is a very important consideration for the industry as a whole. 2022 will see more conventional investors coming into the Sukuk market as long as there are issuers to absorb the amount of capital who are looking for ethical and sustainable solutions.

Consumer choice remains limited
The problem is there are just not enough options and although there will be one new entrant in the actively managed equity space in early 2022, there is no Sukuk fund (to achieve the equivalent conventional bond/equity fund mix which is the backbone of all portfolio allocation decisions).

The market is not small; currently with over US$2 billion invested in the HSBC fund but with no effective workplace pension solution, opening this market to retail investors will take some heavy investments in both education as well as technology.

Innovation and investment
The general buzz in the market certainly sets an example for the rest of the world in terms of actual, client-facing and retail offerings to, hopefully, change the local market. Which ones will succeed in 2022 and survive beyond that into later-stage funding rounds supported by venture capital and private equity firms remain to be seen.

Again this is good news with some conventional funders looking at the UK as a benchmark for potentially attracting business into Europe and beyond. The recently announced UK green Sukuk initiative, although some way off, may start to focus investors on finding early opportunities to invest in green corporate Sukuk in UK businesses.

Conclusion
The UK market continues to cement its position as one of the leading countries for Islamic finance. From the initiatives of the government and industry participants actively engaging with the global Islamic finance industry to entrepreneurial activity to address challenges for the consumer, the UK market has demonstrated a remarkable spectrum of initiatives.

Much work needs to be done to create the environment for changing the domestic landscape but this is a distinct improvement over the situation in 2019 or 2020 despite the disruptions caused by COVID-19.

Among the crop of innovators and entrepreneurs who have featured in 2021, will there be an Islamic unicorn to emerge out of the UK by 2023? That would be interesting.

Dr Scott Levy is CEO of Bedford Row Capital. He can be contacted at [email protected].