As explained on my page "What can British Muslims expect from Boris Johnson's Conservative Party?" Britain's Prime Minister, Boris Johnson does not have a particularly positive reputation on issues concerning Muslims.
Accordingly the editor of the magazine Islamic Finance News asked me what I expected from Mr Johnson's administration with regard to Islamic finance. I made that the subject of my January 2020 column in the magazine.
You can read it below.
In last month’s general election, the Conservative Party led by Mr Boris Johnson won with a majority of 80. Accordingly, barring unforeseen circumstances, this government can expect to be in power for the next five years and the majority means it can pass any legislation it wishes.
Many British Muslims have expressed concern about the result worried by Mr Johnson’s long history of making derogatory comments about ethnic minorities and, most notably, niqab and burqa wearing Muslim women.
Leaving aside general political questions, what does the results mean for the Islamic finance industry? This matters primarily for the UK but is also relevant globally since the UK is the leading non-OIC country in Islamic finance.
It helps to remember why since the mid-2000’s the UK government has been so supportive of Islamic finance. Its goals were:
The inclusion task has largely been achieved, although for commercial reasons many gaps in the retail Islamic financial services space remain. I do not expect any negative government policies. Indeed, since the government has a secure majority, progress on unfinished business such as implementing the long-delayed Shariah compliant student finance scheme may even accelerate.
The bigger question is what will happen to the wholesale Islamic finance sector where the UK has several dedicated Islamic investment banks, and many UK conventional banks offer wholesale Islamic financial services, not just to UK customers but also internationally.
The key uncertainty is what happens to the ability of UK-based entities to provide financial services in EU countries (“passporting rights”) once the UK leaves the EU on 31 January 2020, or more precisely once the Brexit transition period ends on 31 December 2020.
The government has stated that it is committed to preserving its freedom of regulatory divergence from EU rules after 31 December 2020. I expect that, in response, the EU will terminate passporting rights. This termination is likely to be gradual rather than instantaneous to minimise disruption, but the political and commercial imperatives for the EU appear aligned on this point.
Historically, these passporting rights were a key selling point for London as a location for international Islamic investment banks. Accordingly, London will be a less attractive location in future for any new international Islamic investment banks.
London based bankers may seek to console themselves with the opportunity to do more international business outside the EU, once they are no longer constrained by EU financial services rules, since the UK will be an independent rule maker.
However, I expect them to be disappointed.
The most important potential customer territories, because they are the largest economies, are countries such as the USA, China, Japan, and India. However, such countries are adept at enacting financial services rules which have the effect of making it prohibitively difficult for foreigners to provide financial services within that country. Negotiating as a single entity, the UK will have little leverage to counteract such protectionist rulemaking.
Accordingly, the international market will reduce to smaller countries which have less scope for protectionist rulemaking.
To summarise, I do not expect the government to do anything to directly harm the UK Islamic financial services industry. However, the long-term consequence of leaving the EU will be to weaken the industry by reducing the available international market.