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Written 21 December 2013, published 10 March 2014

Each year the magazine Islamic Finance News publishes a guide to of the Islamic finance industry globally. I was asked to supply a UK page which I did on 21 December 2013. The review of the year was published on 27 February 2014.

Accordingly I have reproduced below the UK page that I contributed. While Islamic Finance News can generally only be read by subscribers, some of the material on its website is available to non-subscribers. Select "Report" from the main menu; some items have a padlock and some do not.

IFN Guide 2014 - UK: Stepping up its game

2013 was the year that the shadows of the global financial crisis began to lift, both in the UK generally and also in the UK Islamic finance industry.

The crisis which began in autumn 2008 led to several planned establishments of Islamic banks in the UK being cancelled or put on hold. Although the problems of dealing with the crisis were never cited as a reason for not proceeding with a UK Government sukuk, they will have seriously curtailed the amount of attention that the Government could give to the Islamic finance industry given its tiny size in the UK compared to the conventional finance industry.

In 2013 UK economic conditions began to improve noticeably, especially in the latter part of the year. That has led to greater business confidence generally. Islamic finance got a particular boost in visibility in October 2013 when the UK became the first country outside the OIC to host the World Islamic Economic Forum (WIEF).

2013 a review

All of the UK’s Islamic banks published accounts for the year ended 31 December 2012, and these are the most recent complete results available for the industry. The key statistics are summarised below.

Five of the banks below were in operation before the global financial crisis. The newcomer, ADIB (UK) is a wholly owned subsidiary of Abu Dhabi Islamic Bank PJSC of Abu Dhabi and only started operations in April 2012 so was still in a start-up phase in the period covered by the accounts. Like IBB it is a retail bank, while the others are wholesale banks.

The results show just how hard it is to make profits in the UK Islamic finance market. Even the most profitable bank in terms of return on equity, Gatehouse, achieved only 2% which is unacceptably low from any shareholder’s perspective. There are several factors which contributed to the poor results above:

• ADIB was in a start-up phase, when costs tend to arise before revenues.
• The UK retail Islamic finance market is tiny. IBB has focused on this market since inception, making losses of this scale in every year of operations. HSBC’s decision announced in late 2012 to exit this market looks entirely rational.
• The Bank of England, like the European Central Bank and the Federal Reserve System, is keeping interest rates very low for economic reasons. This interest rate environment makes it much hard for banks to be profitable. While Islamic banks do not make interest bearing loans, their finance pricing depends on market interest rates.
• Even the largest of the Islamic banks, BLME, is tiny compared with mainstream UK retail or wholesale banks. Many of the overhead costs that banks face, such as having appropriate accounting systems and regulatory controls, bear disproportionately heavily on small banks which have less business to spread them over.

The highlight of the year was the following announcement by Prime Minister David Cameron during his speech at the opening of the WIEF in London:

“This government wants Britain to become the first sovereign outside the Islamic world to issue an Islamic bond. So the Treasury is working on the practicalities of issuing a bond-like sukuk worth around £200 million and we very much welcome the involvement of industry in developing this initiative which we hope to launch as early as next year.”

A few weeks earlier the Prime Minister hosted his annual Eid Reception at 10 Downing Street and announced that the Government planned to introduce Shariah compliant student loans and start up loans to ensure that these schemes could be taken up by Muslims without religious impediments.

2014 a preview

The key development to expect is 2014 is for the UK sovereign sukuk issue to take place. The £200 million size appears to have been set at a level where the Government can be confident that demand from domestic UK Islamic banks will be sufficient to absorb the entire issue, so that is seen to be a success.

Conclusion

I believe people will look back on 2013 as the year when the UK Islamic finance industry finally recovered from the global financial crisis. The Prime Minister’s sukuk announcement has been a significant boost to practitioners’ morale and should ensure that the UK maintains its Islamic finance lead over all other non-OIC countries.

Mohammed Amin is an Islamic finance consultant and was previously UK Head of Islamic Finance at PricewaterhouseCoopers. He can be contacted via his website www.mohammedamin.com