19 July 2014
The 16 July 2014 edition of the magazine Islamic Finance News had a "Country Feature" on the UK. I was asked to contribute and decided to look back at the history of Islamic finance in the UK over roughly the last eight years. I described it as like a roller coaster.
While the full magazine is only available to subscribers, you can read my article below.
Looking back at Islamic finance in the UK over the last eight years is rather like looking at a roller coaster, with peaks of excitement and troughs of depression.
In June 2006 Gordon Brown MP, at that time Chancellor of the Exchequer, spoke at the Islamic Finance and Trade Conference organised by the Muslim Council of Britain, and announced “the ambition for Britain to be the global gateway to Islamic finance and trade.” The following spring the Economic Secretary to the Treasury Ed Balls MP, called over 20 Islamic finance experts to 11 Downing Street to set up the Islamic Finance Experts Group to advise the UK Treasury. The Government announced a study to consider whether the UK should issue a sovereign sukuk.
The Government’s initiatives were mirroring private sector activity, with a succession of Islamic banks, and also other Islamic financial institutions, being set up in the UK between 2005 and 2008.
The excitement of these early developments was followed by a trough. The UK’s study into a sovereign sukuk dragged on interminably, until in October 2008, during the bottom of the global financial crisis, the Government announced that it did not consider a sovereign sukuk to be value for money. While the Government professed continuing interest in Islamic finance, apart from some changes to tax and regulation law it did nothing else. Eventually even the changes to tax law petered out, despite various anomalies in the taxation of Islamic finance still remaining.
Meanwhile the private sector buckled down to surviving the global financial crisis. For example, in 2009 every single Islamic bank in the UK lost money.
In October 2013 the World Islamic Economic Forum (WIEF) came to the UK. This was the first time the WIEF has been held outside a Muslim-majority country. The advance planning for the event of course took many months.
The impending presence in the UK of many Muslim heads of government and business leaders had a transformative effect on the UK government’s interest in Islamic finance. It came together with the theme of international competitiveness, referred to as “the global race”, to which the UK government has given increasing attention. It led to a flurry of announcements.
On 21 October 2013 Prime Minister David Cameron hosted an Eid reception at his official residence, No. 10 Downing Street. During that he announced that the government would bring in business start-up loans, enterprise allowances and student finance loans that were consistent with all the principles of Islamic finance. Just over a week later when opening the WIEF in London, the Prime Minister announced that “This government wants Britain to become the first sovereign outside the Islamic world to issue an Islamic bond.” Unlike the announcement in 2007 of a study, this was a definite statement of intent.
The Government has followed through. Last month it announced “The government has today (25 June 2014) cemented Britain’s position as the western hub for Islamic finance by becoming the first country outside the Islamic world to issue sovereign Sukuk, the Islamic equivalent of a bond.” It had issued a £200 million sukuk maturing on 22 July 2019, with a profit rate of 2.036% in line with the yield on conventional UK government bonds of similar maturity.
The UK is already the world’s pre-eminent centre for international conventional finance. It also has a very strong position in international Islamic finance, with many international transactions being structure and documented by banks, law firms and accounting firms based in the UK. The kudos gained from issuing the first sovereign sukuk outside the Islamic world can only help to cement this status, while other international financial centres such as Hong Kong are racing to follow the UK’s lead to avoid being left behind.
These developments pose an important competitive challenge to Islamic finance centres such as Kuala Lumpur, Bahrain and Dubai. Each has a very strong domestic Islamic finance market, and a significant level of international reach, but lacks the overall scale and credibility of London. It will be interesting to see what strategies each of them follows.
Mohammed Amin MA FCA AMCT CTA (Fellow) is an Islamic finance consultant and was previously UK Head of Islamic Finance at PricewaterhouseCoopers LLP.