Europe’s capital of Islamic finance

Shariah finance – that is, financial services products that comply with Islamic law, including a prohibition on interest – has expanded massively since it was first developed in the Middle East in the 1970s.

Today, with annual growth in the sector estimated at as high as 20—25 per cent, Shariah-compliant fund managers alone have £162.7 billion in assets under management.

A natural second home

That the UK should be at the heart of this growth in Europe is unsurprising, given its combination of demographics, and innovative and open financial markets.

If you’re from the Gulf and you want to set up an overseas office, you start in London.

Mohammed Amin

Tax partner

PriceWaterhouseCoopers (PwC)

Propelling the demand for Islamic financial products is a combination of domestic investment from UK-based Muslims and international investment from oil-rich Gulf Cooperation Council states.

“British Muslims are wealthy as a community, and they’re interested in markets,” says Professor Meziane Lasfer of Cass Business School, who is behind the UK’s first MBA course in Islamic finance.

“It’s quick to invest. The process is open. There’s less red tape [than in other markets].”

Add to this the fact that for Muslim businesspeople from Gulf states, London is a natural second home.

“If you’re from the Gulf and you want to set up an overseas office, you start in London,” says PriceWaterhouseCoopers (PwC) tax partner Mohammed Amin.

‘Advanced and sophisticated’ markets

Although nascent Islamic financial markets are emerging in other European countries, the UK is already advanced and sophisticated in this area.

Legislation from 2005 enabled the introduction of Islamic banking. Retail banking came via specialist banks and global majors, such as HSBC, targeting the UK’s 2 million Muslim consumers.

The UK will stand as a beacon on Islamic finance, but it will take other countries a long time to catch up.

Darshan Bijur

Director of Islamic Finance Advisory

KPMG

The UK’s first Islamic investment bank, European Islamic Investment Bank, was listed last year on AIM.

In addition, several Islamic hedge funds, including one developed by a UK subsidiary of Société Générale, are scheduled to launch in the near future. The UK government itself is rumoured to be planning a Shariah-compliant bond issue towards the end of this year, making it the first Western government to tap this market.

The range of Shariah-compliant products includes sukuk (Islamic bonds) for institutional investors, introduced in the UK in 2007, and takaful (insurance), offered by mainstream financial institutions including HSBC, Lloyds TSB and, soon, German insurer Allianz.

London's strength as a market for Islamic finance lies in secondary market activity. However, Standard & Poor’s in March claimed London would soon overtake Middle Eastern financial capitals such as Dubai for sukuk issues.

Top-level champions

Regulators and the Government have thrown their weight behind removing barriers to Islamic financial services.

In a recent speech, Financial Services Authority (FSA) Chairman Sir Callum McCarthy laid out the UK position, saying, “It is important that we showed we were able to accommodate Islamic banking practices alongside traditional non-Islamic banking, for reasons both of principle and of practical importance.”

Official backing was evident in the most recent UK Government Budget, which equalised tax treatment of Islamic financial products.

This was “an extremely significant event”, says Darshan Bijur, Director of Islamic Finance Advisory at KPMG.

“It burst the dam walls and it will be impossible to build them back up again. Liquidity will flow.

“The UK will stand as a beacon on Islamic finance, but it will take other countries a long time to catch up.”