The Bank of England’s recently launched alternative liquidity facility (ALF) is slated to drive growth in the sector in 2022 (Shutterstock).

Islamic Finance

Outlook 2022: UK Islamic finance sector navigates COVID-19 and the post-Brexit era

UK Islamic finance sector makes progress during pandemic but needs continuing development, say stakeholders.


London: After two years of the COVID-19 pandemic and in a post Brexit era, Islamic finance is set to play a greater role in the country’s economic recovery and future, but practitioners say that more development is needed to realise the potential.

Bashar Al Natoor, the Global Head of Islamic finance at Fitch Ratings, said that the UK Islamic finance industry has growth potential.

“The government’s promotion of London as a Western hub for Islamic finance and as a key international sukuk listing venue, along with the small-albeit-growing Muslim population, and regulations, legal, and tax infrastructure that are able to accommodate Islamic products,” he said.

However, he said that the domestic Islamic finance industry in the UK is niche and is not likely to gain mainstream relevance in the long-run.

“The sector faces multifaceted challenges, including the lack of bottom-up public demand for Islamic products as Muslims make up only about 5.1% of UK’s population as of 2017,” he said. “Growth is hindered by a lack of public awareness, with segments of their target market lacking confidence in the Sharia-compliance of products.”

BoE’s ALF set to support banks

The most significant development has been the opening of the Bank of England’s (BoE) alternative liquidity facility (ALF), which officially began accepting deposits last month.

The ALF seeks to enable British Islamic banks to have an account at the central bank to use as a high-quality liquid asset (HQLA). Similar to conventional banks, Islamic banks are required to hold a buffer of HQLA. Historically, this was difficult for Islamic banks in managing liquidity because the BoE’s existing facility is interest-based and there were no Sharia compliant liquidity facilities. The new ALF is seeking to level the playing field for Islamic banks.

“[The ALF] is something that Al Rayan Bank has long called for – and which will help to ensure that Islamic banks have greater flexibility in meeting regulatory requirements under Basel III prudential rules,” said Maisam Fazal, Chief Commercial Officer at Al Rayan Bank.

Charles Haresnape, CEO of Gatehouse Bank, one of the UK’s Sharia compliant institutions, said that the creation of an overnight banking facility for Sharia compliant institutions is a fantastic step forward and is another example of the UK leading the way in Islamic finance.

Banks upbeat about 2022

There are six Islamic banks in the UK, although each are serving different areas of the market like retail, corporate, private and real estate financing.

At least two executives expressed optimism for 2022, despite the ongoing pandemic and domestic economic challenges like rising inflation and a tightening supply chain.

“This year is about growth. We have ambitious plans across our three distinct and complimentary businesses - wealth management, real estate and Nomo, our digital bank,” said Andrew Ball, CEO of Bank of London and the Middle East (BLME). “This is core to achieving our goal to become the UK’s leading provider of Sharia compliant wealth management solutions for Gulf Cooperation Council (GCC) nationals.”

Similarly, Charles Haresnape is similarly upbeat about the coming year but has urged caution due to certain challenges.

“[In terms of challenges] the future impact of the COVID-19 pandemic and the UK economy are the biggest unknowns as well as inflation and the trajectory of the BoE base rate. Their impact on the property, investment and savings markets will have to be closely watched this year.”

Muted sukuk issuance

In March 2021, the UK sold its second sovereign sukuk. The £500 million ($681.6 million) Sharia compliant debt which matures on 22 July 2026, offers a profit rate of 0.333%, flat to the yield on the 1.5% gilt (British sovereign bonds) due July 2026.

The sophomore sukuk follows the UK’s debut sukuk in 2014, which consisted of a five-year £200 million ijara sukuk.

In terms of another potential issuance Stella Cox, managing director of DDCAP Group, said that the financial infrastructure, and structural and transactional precedents, are firmly in place after the two sovereign issues.

“I am sure that HMT [Her Majesty’s Treasury], which has long since viewed Islamic finance as a significant contributor to the UK's and London's capacity, diversity and competitiveness as a leading, global financial centre, will continue to explore all available options,” she said.

A HMT spokesperson told Salaam Gateway in an emailed statement: “The position remains that HMT and DMO [Debt Management Office] keep the case for issuing further sukuk under review, but there are no current plans to issue in the immediate future.”

Outside of the sovereign’s two respective issuances, there has been little activity in the domestic market. In February 2018, Al Rayan Bank sold a £250 million sukuk which consisted of a Sharia compliant equivalent of a residential mortgage-backed security.

Bashar Al Natoor, the global head of Islamic finance at Fitch Ratings, is sceptical as to whether there will be a flurry of UK sukuk activity in the coming year. “UK-based corporates, financial institutions and government agencies are not active sukuk issuers and investors,” he said.

Green sukuk, ESG on the agenda

Another area which is set to gain more attention this year will be green and sustainable sukuk as well as the role of environmental, social and governance (ESG) principles in Islamic finance.

In November, industry stakeholders led by the UK Islamic Finance Council (UKIFC), established a High-Level Working Group (HLWG) on green sukuk.

The three-year initiative, which launched on the sidelines of the UN Climate Summit COP26 in Glasgow, seeks to focus on the development of green and sustainable sukuk. Members of the group include HMT, Indonesia’s finance ministry and the Islamic Development Bank, which seek to focus on green and sustainable sukuk.

Omar Shaikh, advisory member of UKIFC, said the not-for-profit group will seek to build on HLWG on green sukuk launched at COP26. He said that 2022 activities will include working group meetings in the first and second quarter, and at COP27, as well as public events, workshops and annual progress reports

He also said that UKIFC will continue with progress that has been made on the Global Islamic Finance and Sustainable Development Goals (SDGs) Taskforce that it established in 2020.

“We are looking to re-run our Global Islamic Finance and SDGs Summit during the UN General Assembly in September,” said Shaikh. “We will also be exploring specific projects on Islamic social finance with the UN and the tayibb concept.”

The tayyib, or wholesome, concept, according to the UKIFC, “contends that the focus of Islamic finance products and services should be on the evaluation of wider societal impact rather than an overly legalistic analysis of Sharia compliance.”

Overseas markets

The UK and GCC states are working to sign a free trade agreement by the end of this year. The GCC is a strategic trading partner with the UK, accounting for £22 billion ($29.9 billion) in British exports and £30 billion ($40.9 billion) in bilateral trade.

As result, British authorities will be keen to utilise Islamic finance through UK Export Finance (UKEF), the country’s export credit agency.

A UKEF spokesperson said that the Middle East accounts for the largest share of UKEF’s portfolio and made up around 44% of UKEF’s international portfolio in 2020/21. The majority of this resulted from support of UK exports to Oman, the UAE, Iraq and Saudi Arabia, according to the spokesperson.

“UKEF has experience in supporting Islamic finance structures and we are keen to draw further on that experience,” said the spokesperson. “As with other forms of finance, UKEF’s support allows for the diversification of the financing accessible by sovereigns or corporates.”

In the past, UKEF has been involved in sukuk and other Islamic transactions. For example, it supported the delivery of four Airbus A380 aircrafts to Emirates Airlines by guaranteeing the issuer’s sukuk in 2015.

“UKEF has provided Islamic finance support to UAE and Malaysian borrowers,” said the spokesperson. “UKEF has cover available in more than 200 countries and is open to explore adequate financial structure for projects in the Middle East but also Asia or Africa where Islamic finance might be required.”

Rise of fintech and digitalisation

Imam Qazi, partner at law firm Foot Anstey, believes that one of the biggest opportunities for Islamic finance in 2022 lies in embracing technology.

“There are opportunities for fintech companies to grab market share and accelerate the growth of the market by introducing fresh products and services to the younger generation. (They) are new to the world of financial services and have an impatient demand for the seamless delivery of products that are ethical and fully aligned to Islamic values,” he said.

Qazi said there are opportunities for all Islamic finance market participants to up their technology game to drive efficiencies and improve output.

Islamic neo banks offering Sharia compliant services have seen significant activity over the past few years and is likely to continue in 2022.

Similarly, the emergence of crowdfunding, peer to peer (P2P) and investment platforms are likely to continue. For example, Nester, a new Sharia compliant P2P platform, which is to roll out later this quarter, will seek to offer real estate financing as well as fixed income investment opportunities.

“Sharia compliant crowdfunding and P2P platforms are also enjoying a very strong growth trajectory that is having an increasingly positive impact on both the mobilisation of funding and the diversity of asset classes that Sharia compliant funds can encompass, including those with lower ticket values,” said DDCAP Group’s Cox.

Similarly, incumbent Islamic banks increased their digital offering during the pandemic and this is likely to continue.

“We’ve already seen over 30,000 of the bank’s customers choose our digital banking platform for their day-to-day banking with us, and the expansion of this channel is continuing to be driven by customers’ demand,” said Al Rayan’s Fazal.

Other UK Islamic banks could also offer new platforms to meet their customers’ needs and demands.

For example, in July 2021, Kuwait-based Boubyan Bank, a majority shareholder in BLME, said it launched Nomo. It classified a Nomo as a fully licenced and regulated UK digital Islamic bank and launched it through BLME.

© 2021 All Rights Reserved


Islamic finance
Islamic Banks