Islamic finance in the UK: Soaring ambition

Despite its leading position as a western Islamic finance hub, the UK Islamic finance industry faces growing challenges including the lack of a lender of last resort and the absence of a UK sovereign sukuk. Jan Dinger explores.

In 2011, Islamic finance investments continued a long run of global growth to reach around US$1.3 trillion by year-end, with the UK still in first place as the leading western provider of Islamic finance, hosting US$19 billion in Shariah compliant assets. London’s profile as the western leader of Islamic finance has grown in recent years, (although institutions in the country have in fact been providing Shariah compliant financial services for 30 years) and London is seeking to further consolidate this position.

The development of Islamic finance in the UK has been strongly supported over the last 10 years by government policies designed to broaden the market for Islamic products for both Shariah compliant institutions and conventional firms with Islamic windows; policies that have enjoyed broad cross-party support. Key policy objectives are twofold: Firstly, the UK government wanted to establish and maintain London as Europe’s leading centre of international Islamic finance; and secondly, it wanted to ensure that nobody in the UK would be denied access to competitively priced financial products on account of their faith.

Government initiatives

In 2003, the government established a specific fiscal and regulatory framework to facilitate the development of Islamic finance in the UK and to meet policy goals, with initiatives including the removal of double tax on Islamic mortgages and the extension of tax relief on Islamic mortgages to both companies and individuals, and the reform of arrangements for bond issuance to enable returns and income payments to be treated ‘as if’ interest, making London a more attractive location to issue and trade sukuk. The Financial Service Authority also launched initiatives to ensure that regulatory treatment of Islamic finance was made consistent with its own statutory objectives and principles.

Beyond government support, the UK offers a number of other key strengths in the western Islamic finance competitive marketplace. First and foremost, five fully Shariah compliant banks were established in the country between 2004 and 2008, putting it in the lead in western Europe. The Islamic Bank of Britain is the first wholly Shariah compliant retail bank established in the West. The other four are:

  • The Bank of London and The Middle East (BLME), an independent wholesale Shariah compliant bank offering corporate banking, treasury and wealth management that comprises private banking and asset management.
  • Gatehouse Bank, a Shariah compliant wholesale investment bank operating in capital markets, real estate, asset finance, treasury business and Shariah advisory services.
  • QIB UK, which offers Shariah compliant financing and investment products, and Shariah compliant investment banking services including trade finance, private equity and asset management.
  • The European Islamic Investment Bank, the first Shariah compliant Islamic investment bank authorized by the Financial Services Authority. Its offering covers Islamic treasury and capital markets, Shariah advisory, private equity and asset management.

There are also another estimated 17 conventional banks that have set up Islamic windows in the UK and this total of 22 Islamic banks substantially exceeds that in any other western country or offshore  centre. Moreover, many of those firms are members of UK Islamic Finance Secretariat, which is part of TheCityUK, and thus benefit from this trade body’s efforts to promote UK financial services at home and abroad, and to lobby for favourable regulation that will support rather than hinder the development of the industry, be it conventional or Islamic.

The UK’s Islamic financial product offering is also broad, with 37 sukuk worth US$20 billion currently listed on the London Stock Exchange, including 10 raised in 2011. The UK also has a Takaful offering, mainly through HSBC Amanah’s home insurance, and liquidity management facilities through treasury murabahah, a key component of Islamic banks’ liquidity management options.

These are usually commodity-based contracts of the London Metal Exchange that are traded off exchange. SWIFT, the society for world interbank payments, has developed an automated messaging standard to support such murabahah transactions in replacement of the traditional paper process.

Islamic funds in the UK

In terms of Islamic funds, BLME launched a real estate fund in 2011, and a total of seven Shariah compliant exchange traded funds (ETFs) and two Shariah compliant exchange trade products (ETPs) are listed on the London Stock Exchange. Previously, new offerings in 2009 had included a money market fund by the BLME and a sukuk fund by QIB UK, and other offerings in 2008 comprised a fund of equity funds launched by SEI — a world premiere for this type of fund — the first Shariah compliant retail capital-protected equity fund in the UK set up by Alburaq; and the launch of the FTSE Bursa Malaysia H?rah Sharia Index by FTSE Group in association with Bursa Malaysia.

Real estate has also been an increasingly important asset class for Islamic finance transactions and banks in the UK. Islamic monies have proved to be a strong new source of funds for the UK real estate market, and in turn Islamic finance institutions in the UK have used real estate as an investible, tangible asset class on which to base their financial structures. For non-UK investors, the focus has tended to be on prime or trophy assets, but in the last few months, mezzanine finance structures have been cropping up more often as an alternative means of investing in real estate.

In such structures, the majority of the loan follows a conventional, interest-based structure and a minority is governed separately, in a Shariah compliant way. A senior conventional bank and a Shariah compliant mezzanine lender enter into an inter-creditor agreement which governs the way each loan is treated and takes into account the Shariah compliance requirements of the mezzanine lender, the conventional bank managing the interest-based tranche of the loan and the mezzanine lender managing the Shariah compliant tranche.

In addition to this variety of products, the UK’s Islamic banks, sukuk issuers, exchange-traded product providers and mezzanine lenders, etc. are supported by a sturdy infrastructure of law firms, services firms and educational facilities. The UK is a major global provider of the specialist legal expertise required for Islamic finance, with around 25 major law firms providing legal services in Islamic finance.

Moreover, the largest professional services firms all have Islamic finance teams in the UK to provide the whole array of necessary specialist services including advice on tax, listings, transactions, regulatory compliance, management, operations and IT systems to help institutions ensure their operations are compliant.


In terms of specialist education, as global demand for skills grows following the expansion of Islamic finance, the UK institutions are at the international forefront of providing qualifications for the industry. Courses in Islamic finance are offered by the Chartered Institute for Securities and Investment (CISI), the Chartered Institute of Management Accountants, the Association of International Accountants and the Institute of Islamic Banking and Insurance; while at least 10 universities and business schools offer an Islamic finance qualification, and the Islamic Finance Council UK has developed a scholar professional development program in conjunction with the CISI, with the objective of teaching conventional finance to Shariah scholars worldwide.


However, the UK’s Islamic finance industry also faces certain challenges. One of these is that, for Islamic banks, there may be no lender of last resort with regards to liquidity management, since the Bank of England does not offer Shariah compliant facilities.

Another is the lack of a UK sovereign sukuk. The Islamic finance industry in the UK is keen for one, but the government does not currently have plans for one. Lord Sassoon, the commercial secretary to the Treasury, made a statement on the matter in January 2012, saying that a UK sovereign Sukuk “does not currently offer value for money, at a time when Treasury gilts are giving their lowest yield. The priority [for the Treasury] is to raise the cheapest debt in relation to fiscal discipline”.

There had been an original plan for a UK sovereign sukuk, for approximately GBP2 billion (US$3.2 billion) with a GBP100 to 200 million (US$162 to 324 million) initial issuance, the UK government using its own assets to support it via a lease structure to ensure Shariah compliance (the government would have leased the right to use assets, such as bridges or roads, to a special purpose vehicle company against payment of a rental stream). The issuance of such a sovereign sukuk would bring UK Islamic banks an important outlet in which to invest because it would present no danger of contamination by interest.

Meanwhile, the Basel III regime due to come into force will mean that the only commercial paper on which UK Islamic banks could currently rely would be that issued by the Islamic Development Bank, severely limiting Islamic financial institutions’ access to this type of assets.

In the absence of a UK sovereign sukuk, there has therefore been a call for UK Islamic banks to be able to keep deposits at the Bank of England as a safe haven, but without a UK or European government sukuk the continued development of UK Islamic banks will be hindered. Unfortunately, many commentators have said that the European debt crisis has made the issuance of a sovereign sukuk in Europe a more remote possibility.

Until recently, the UK had enjoyed an inbuilt advantage in its attempt to become the hub of Islamic finance in Europe, which is the fact that English law is often the governing law of international Islamic finance transactions. For example, a Swiss bank and a Middle Eastern counterparty wanting to enter into an Islamic finance transaction will often choose to use English law to structure their documentation in order to give flexibility and certainty to both sides.

Nonetheless, in recent years other western jurisdictions have begun to put in place measures designed to attract Islamic finance transactions. For example, Ireland introduced a tax neutrality regime for Islamic finance in 2010, and has signed over 60 double tax treaties ensuring there is no double taxation for such structures, with countries such as Malaysia, Saudi Arabia or the UAE. Luxembourg ruled out a government sukuk in 2011, but has attracted over 40 Islamic funds so far and heavily promotes its support of Islamic finance.

If it went back on its decision, being the first European country to issue a government sukuk would certainly put it on the map in a very significant way. Turkey is also a country to watch. Straddling Europe and Asia, it has a 70 million plus population that is 99% Muslim. Companies in Turkey are allowed to issue Islamic compliant debt and the first corporate sukuk has already been undertaken by a leading Turkish bank while the country recently also issued its first sovereign sukuk.


Despite its first mover advantage, solid infrastructure and strong government support to help keep it in the lead, the UK nonetheless faces rising challenges in the lack of a lender of last resort and the absence of a UK sovereign sukuk, at a time when a number of neighbours are putting particular efforts in place to edge ahead. If it wants to maintain its competitive advantage and leading position, the UK will need to continue to bolster its support for the industry and strengthen Islamic banking infrastructure.

Jan Dinger is the regional sales director at Advent Software.

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