Cicero Policy Briefer

Issue 17, October 2007

Islamic Finance in the UK—Challenges and Prospects

By M Iqbal Asaria, Managing Director, Afkar Consulting

Global Islamic assets managed by Financial Institutions are now estimated to amount to over US$500 billion—a figure which is growing by over 25 per cent annually. The range and complexity of the products on offer is also growing daily. Indeed, most products offered by conventional financial institutions now find their match in equivalent Islamic products. The governments of Malaysia and many Gulf Cooperation Council (GCC) countries are now actively encouraging Islamic financial institutions and products, while Islamic financial institutions are also springing up in Pakistan and many African countries.

As a result, a niche industry which started barely 30 years ago is now poised for a major leap in the next decade. With the growth of Kuala Lumpur and Dubai as Islamic Finance hubs and Bahrain, Saudi Arabia and Qatar eyeing this space as well, established centres such as London need to take stock and redouble their efforts to retain their edge.

London has been a leading centre for wholesale Islamic Finance transactions for over two decades. The unique combination of legal, structuring, accounting expertise and an accommodating regulatory environment has aided this growth. Over the last five years this has been supplemented by the development of a retail Islamic financial services industry catering for the resident Muslim population in the UK. These nascent services are now gaining critical mass. By way of illustration, there are now over US$1.5 billion dollars of Islamic home finance advances already made. Providers are working on commercial finance, property finance, savings products, takaful (insurance) and pension provision. Efforts are also underway to move to a second generation of Islamic financial products. In the first wave, the focus was on replicating conventional products in a sharia compliant way. Now, there are moves to launch products that fit much more closely with the requirements of the target community.

Two developments, if properly capitalised upon, can help ensure that London remains the premier centre for Islamic finance.

If the retail products launched in the UK are ‘passported’ to other countries in the EU then the target market expands to nearly 20 million customers. This is a vast market and with London as the centre of origination of most of these products, the City can benefit tremendously from any such development.

Secondly, if imaginative use is made of sukuks (Islamic bond equivalents) to fund regeneration and infrastructure development, especially in inner city areas, then the vast liquidity in the GCC countries can be effectively tapped. Unlike during the 1970s, around 40 per cent of surplus liquidity in the GCC countries is now only available for Islamically structured products. Again London, with its established base in this field, can play a lead role in this process and retain its edge.

As Islamic finance enters the global mainstream, the City needs to be alert to, and capitalise upon opportunities that will allow it to continue to play a leading role in this important field.

M Iqbal Asaria is the Managing Director of Afkar Consulting Ltd and the former Chair of the Business and Economics Committee of the Muslim Council of Britain (MCB), and can be contacted here.

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