How can Islamic finance contribute to UK’s growth post-Brexit?

Photo: LONDON, UNITED KINGDOM - SEP 3, 2016: Flags at a march was organised through social media to take the concerns of the Remain voters to the government of Britain following the UK Referendum in June, 2016 / Ms Jane Campbell / Shutterstock, Inc.

Last year’s United Kingdom vote in favour of leaving the European Union, or “Brexit”, has cast some general uncertainty on the UK’s economic future. Can Islamic finance help the UK, and to what extent will Brexit affect the UK’s Islamic finance ambitions?

One of the most talked about potential impacts of the vote in favour of Brexit is the possible exodus of banks from the UK to countries in the European Union. The main reason fuelling such speculation is the strong possibility that following upcoming negotiations with the EU, the UK will no longer be allowed access to the single market. This would likely entail a withdrawal of the UK’s existing passporting rights.

Currently, banks in the UK rely on a European “passport” arrangement with the EU that allows them to cater to clients across all 28 EU member states from a single base in the UK. In light of the distinct possibility that these arrangements could come to an end post-Brexit, several banks, such as Japan’s Daiwa Securities Group’s investment banking arm and UK retail bank Lloyds Banking Group, are actively making contingency plans to relocate to or open subsidiaries in the EU.

As we moved into 2017, banks are still weighing plans to ensure they retain access to the EU post-Brexit.

However, Jonathan Lawrence, Islamic Finance Partner at law firm K&L Gates in London, told Salaam Gateway, “The loss of the UK’s passporting rights is by no means certain. The UK government has not revealed its negotiating strategy for the terms of its exit from the EU. It should also be remembered that the passport works both ways. If the UK is outside the European Economic Area (EEA), then EEA located firms will not be able to passport into the UK either.”

REAL ESTATE, SUKUK

“The UK has long aspired to position itself as a leading Islamic finance centre. Much work has been done to improve regulatory infrastructure in order to allow Shariah-compliant banks to expand their offerings,” Zak Hydari, Chief Executive of UK-based investment management company Rasmala, told Salaam Gateway.

Two of the areas in Islamic finance that have seen significant inroads in the UK are the real estate sector and the sukuk market. Regarding real estate, Lawrence observes, “In the last five years, the UK’s Islamic finance industry has been heavily reliant on the commercial real estate market in the UK in order to drive deals that are structured in an Islamic-compliant way.”

“Of the $4.5 billion allocated by Gulf Cooperation Council sovereign wealth funds to global real estate in the fourth quarter of 2014, over 80 percent was spent in Europe and over $3 billion (67 percent) in London alone, according to data from global real estate firm Jones Lang LaSalle,” added Lawrence.

Other instruments, such as sukuk, have also seen strong demand. As Lawrence explained, “In June 2014, the UK government issued a sovereign sukuk, the first by a country outside the Islamic world. Rental payments on real estate provide the income for investors in the sukuk and it is underpinned by three central government properties. The sukuk raised 200 million British pounds but had orders of 2 billion pounds, showing the enormous appetite for the issuance.”

Nafis Alam, Associate Professor of Finance at Nottingham University Business School in Malaysia, underlined the UK’s strength in sukuk as well. “Among the products launched from the UK, one recent example is UK Export Finance guaranteeing its first sukuk in 2015. It was the largest ever capital market offering in the aviation sector with an export credit agency guarantee,” said Alam.

OPPORTUNITIES AND IMPACT ON POST-BREXIT ECONOMY

In terms of the opportunities post-Brexit for the UK to build its Islamic finance credentials, Hydari highlights market awareness as an opportunity for further improvement. “At the moment, many UK companies are simply not aware of the opportunity afforded by Islamic finance, particularly with regards to sukuk issuance or other forms of asset financing. It may be helpful to have the UK government participate in initiatives to promote Islamic finance as a financing alternative for UK companies. This would support capital flows and investment in the UK economy.”

Some, such as Alam, sound a cautious note on the impact of Brexit on Islamic finance in the UK. In Alam’s view, “With news coming out that major conventional banks such as JP Morgan, Goldman Sachs, Bank of America, Citigroup and Morgan Stanley may look for a new legal home base after Brexit, this might prompt Islamic bank subsidiaries to follow suit.”

In addition, Alam notes the potential impact on the UK’s Islamic finance education sector. “These Islamic finance programmes attract students from many EU countries and with changes due to happen to the education sector after Brexit this might seriously dent the UK position as a global leader in Islamic finance education.”

However, one of the important points to note in a discussion involving Brexit and Islamic finance is that Brexit does not change some of the fundamental facts about Islamic finance in the UK. According to Lawrence, the following points still hold true irrespective of Brexit:

1. Islamic finance has never been governed by EU law in the UK or elsewhere

2. The UK has one of the most Islamic-friendly legal environments with the most legislation of any of the EU countries to assist Islamic finance from a political and tax perspective

3. The English language, English law and the English courts remain attractions for overseas investors

4. The need to attract investment is more important than ever                                  

It is important to keep in mind the wider perspective, namely, that the UK will likely remain an attractive destination for Islamic finance investments post-Brexit and that Islamic finance will continue to offer an important source of funds for growing the UK’s economy in years to come.

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