Outlook 2022: UK Islamic finance sector navigates COVID-19 and post-Brexit era | Salaam Footbridge

London: After two years of the COVID-19 pandemic and in a post-Brexit era, Islamic finance is set to play a bigger role in the country’s economic recovery and future, but practitioners say more development is needed to realize the potential.

Bashar Al Natoor, global head of Islamic finance at Fitch Ratings, said the UK Islamic finance sector has potential for growth.

“The government’s promotion of London as a Western hub for Islamic finance and as a key international listing location for sukuk, together with the small but growing Muslim population and capable regulatory, legal and tax infrastructure to welcome Islamic products,” he said.

However, he said the domestic Islamic finance industry in the UK is niche and unlikely to grow in importance over the long term.

“The sector faces multi-faceted challenges, including the lack of bottom-up public demand for Islamic products, as Muslims made up only around 5.1% of the UK population in 2017,” he said. . “Growth is hampered by a lack of public awareness, with segments of their target market lacking confidence in Shariah-compliant products.”

BoE’s ALF ready to support banks

The most significant development was the opening of the Bank of England’s (BoE) Alternative Liquidity Facility (ALF), which officially began accepting deposits last month.

The ALF aims to allow UK Islamic banks to have an account at the central bank to be used as a high quality liquid asset (HQLA). Like conventional banks, Islamic banks are required to hold a reserve of HQLA. Historically, it has been difficult for Islamic banks in managing liquidity as the existing BoE facility is interest based and there were no Sharia compliant liquidity facilities. The new ALF seeks to level the playing field for Islamic banks.

“[The ALF] is something Al Rayan Bank has been calling for for a long time – and will help ensure Islamic banks have more flexibility to meet regulatory requirements under the Basel III prudential rules,” said Maisam Fazal, Chief Commercial Officer of Al Rayan. Bank.

Charles Haresnape, CEO of Gatehouse Bank, one of the UK’s Shariah-compliant institutions, said the creation of a day-to-day banking service for Shariah-compliant institutions is a fantastic step forward and is another example of the UK at the forefront of Islamic finance.

Banks optimistic for 2022

There are six Islamic banks in the UK, although each serves different market sectors such as retail, corporate, private and property finance.

At least two leaders expressed optimism for 2022, despite the ongoing pandemic and domestic economic challenges such as rising inflation and tighter supply chains.

“This year is all about growth. We have ambitious plans across our three distinct and complementary businesses – wealth management, real estate and Nomo, our digital bank,” said Andrew Ball, CEO of Bank of London and the Middle East (BLME). “This is key to achieving our goal of becoming the UK’s leading provider of Shariah-compliant wealth management solutions for Gulf Cooperation Council (GCC) nationals.”

Similarly, Charles Haresnape is equally optimistic for the year ahead, but urged caution due to some challenges.

“[In terms of challenges] the future impact of the COVID-19 pandemic and the UK economy are the biggest unknowns, along with inflation and the trajectory of the BoE base rate. Their impact on the housing, investment and savings markets will need to be watched closely this year.

Muted sukuk broadcast

In March 2021, the UK sold its second sovereign sukuk. Shariah-compliant debt of £500 million ($681.6 million) maturing on July 22, 2026 offers a profit rate of 0.333%, equal to the yield of gilt at 1.5% (sovereign bonds British) maturing in July 2026.

The second sukuk follows the UK’s first sukuk in 2014, which was a £200 million five-year ijara sukuk.

Regarding another potential issuance, Stella Cox, Group Managing Director of DDCAP, said the financial infrastructure and structural and transactional precedents are firmly in place after the two sovereign issuances.

“I’m sure HMT [Her Majesty’s Treasury]which has long viewed Islamic finance as an important contributor to the capacity, diversity and competitiveness of the UK and London as a leading global financial centre, will continue to explore all available options,” said she declared.

A spokesperson for HMT told Salaam Gateway in an emailed statement: “The position remains that HMT and DMO [Debt Management Office] Keep the case for issuing additional sukuk under review, but there are currently no plans to issue in the immediate future.

Apart from the two respective sovereign issues, there was little activity on the domestic market. In February 2018, Al Rayan Bank sold a £250 million sukuk which consisted of a Sharia-compliant equivalent of a residential mortgage-backed security.

Bashar Al Natoor, global head of Islamic finance at Fitch Ratings, is skeptical that there will be a flurry of UK sukuk activity in the coming year. “UK-based businesses, financial institutions and government agencies are not active sukuk issuers and investors,” he said.

Green soukuk, ESG on the program

Another area that is expected to gain more attention this year will be green and sustainable sukuk as well as the role of environmental, social and governance (ESG) principles in Islamic finance.

In November, industry stakeholders, led by the UK Islamic Finance Council (UKIFC), established a High Level Working Group (HLWG) on green sukuk.

The three-year initiative, which was launched on the sidelines of the UN Climate Summit COP26 in Glasgow, aims to focus on the development of green and sustainable sukuk. Members of the group include HMT, the Indonesian Ministry of Finance and the Islamic Development Bank, which seek to focus on green and sustainable sukuk.

UKIFC advisory member Omar Shaikh said the non-profit group will seek to build on the HLWG on green sukuk launched at COP26. He said activities in 2022 will include working group meetings in Q1 and Q2 and at COP27, as well as public events, workshops and annual progress reports.

He also said the UKIFC will continue the progress made under the Global Task Force on Islamic Finance and the Sustainable Development Goals (SDGs) that he established in 2020.

“We are looking to hold our Global Summit on Islamic Finance and the SDGs again during the UN General Assembly in September,” Shaikh said. “We will also explore specific projects on Islamic social finance with the UN and the tayibb concept.”

The tayyib, or healthy concept, according to the UKIFC, “argues that Islamic finance products and services should focus on assessing the wider societal impact rather than an overly legalistic analysis of Shariah compliance. “.

Overseas markets

The UK and GCC states are working to sign a free trade Agreement by the end of the year. The GCC is a strategic trading partner with the UK, accounting for £22 billion ($29.9 billion) of British exports and £30 billion ($40.9 billion) of bilateral trade.

As a result, UK authorities will want to use Islamic finance through UK Export Finance (UKEF), the country’s export credit agency.

A UKEF spokesperson said the Middle East made up the largest share of UKEF’s portfolio and accounted for around 44% of UKEF’s international portfolio in 2020/21. The majority of this resulted from support for British exports to Oman, the United Arab Emirates, Iraq and Saudi Arabia, according to the spokesperson.

“UKEF has experience in supporting Islamic finance structures and we want to leverage this experience further,” the spokesperson said. “As with other forms of financing, UKEF’s support helps to diversify the financing accessible by sovereigns or companies.”

In the past, UKEF has been involved in sukuk and other Islamic transactions. For example, it supported the delivery of four Airbus A380s to Emirates Airlines by guaranteeing the issuer’s sukuk in 2015.

“UKEF provided Islamic financial support to borrowers in the UAE and Malaysia,” the spokesperson said. “UKEF has coverage available in over 200 countries and is open to exploring an adequate financial structure for projects in the Middle East but also in Asia or Africa where Islamic finance may be needed.”

The rise of fintech and digitization

Imam Qazi, a partner at law firm Foot Anstey, believes that one of the biggest opportunities for Islamic finance in 2022 lies in the adoption of technology.

“There are opportunities for fintech companies to capture market share and accelerate market growth by introducing new products and services to the younger generation. (They) are new to the world of financial services and have an eager demand for the seamless delivery of products that are ethical and fully aligned with Islamic values,” he said.

Qazi said there are opportunities for all players in the Islamic finance market to up their technology game to drive efficiencies and improve output.

Neo-Islamic banks offering Sharia-compliant services have seen significant activity over the past few years and are expected to continue into 2022.

Likewise, the emergence of crowdfunding, peer to peer (P2P) and investment platforms should continue. For example, Nester, a new Shariah-compliant P2P platform, due to roll out later this quarter, will seek to offer real estate financing as well as fixed income investment opportunities.

“Crowdfunding and Shariah-compliant P2P platforms are also on a very strong growth trajectory which is having an increasingly positive impact on both fundraising and asset class diversity than Shariah-compliant funds. Sharia can encompass, including those with lower ticket values,” said Cox of the DDCAP Group.

Likewise, incumbent Islamic banks have increased their digital offering during the pandemic and this is expected to continue.

“We have already seen more than 30,000 banking customers choose our digital banking platform for their day-to-day banking transactions with us, and the expansion of this channel continues to be driven by customer demand,” Fazal said. by Al Rayan.

Other UK Islamic banks may also come up with new platforms to meet the needs and demands of their customers.

For example, in July In 2021, Boubyan Bank, based in Kuwait and majority shareholder of BLME, said it launched Nomo. She listed Nomo as a fully licensed and regulated UK digital Islamic bank and launched it through BLME.

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