UKIFC Featured on BBC Radio 4 Money Box
On Saturday 17th July, UKIFC were featured BBC Radio 4's Money Box (around the midday mark) discussing alternative Student Finance, and why Muslim students are not getting equal access to student loans. Whilst halal student finance has been in the pipeline for over eight years, the Department of Education has still yet to deliver on the promise first set out by former UK Prime Minister David Cameron in 2013.
You can watch a short 3 minute clip outlining the need for alternative student finance models below.
UKIFC launch 'Islamic Finance and the SDGs' report
The Islamic Finance Council UK (UKIFC), in partnership with Malaysia based International Shari’ah Research Academy for Islamic Finance (ISRA) and the Global Ethical Finance Initiative (GEFI), has today launched the third report in its 4-part thought leadership series that aims to assist and encourage active engagement in support of the UN Sustainable Development Goals (SDGs) by the global Islamic finance sector.
UKIFC Senior Adviser Sultan Choudhury will formally announce the report, to an audience of over 3,000 financial practitioners, at GEFI’s flagship annual Ethical Finance Summit.
The report provides an analysis of responsible banking in the Islamic finance sector, assessing the level of engagement with the Principles for Responsible Banking (PRB) amongst banks in Organisation of Islamic Cooperation (OIC) member states and analysing the approaches used by 9 Islamic finance signatories. It also features notes from interviews with Al Baraka Banking Group, Bank Pembangunan Malaysia Berhad, CIMB Group, Gatehouse Bank, Gulf International Bank (UK) and Jaiz Bank who have all shown notable leadership in responsible banking.
The PRB, which launched in 2019, is the world’s leading framework for responsible banking and is underpinned by six Principles that help signatory banks to align with the SDGs and the Paris Climate Agreement.
With its underlying Shariah principles, Islamic finance is naturally aligned to responsible banking and is well positioned to lead the financial services sector’s efforts towards achieving the SDGs. However, whilst a small number of organisations are making significant progress the report has highlighted the pressing need to raise awareness, in OIC member states and beyond, of responsible banking and the benefits to be achieved by integrating Shariah compliance with sustainable finance strategies and becoming PRB signatories.
TAKEAWAYS FROM THE REPORT INCLUDE:
- 49 of the 57 OIC member states do not contain any PRB signatory organisations.
- When the PRB was launched in 2019, 14.3% of the founding signatories were based in OIC member states. Now only 10.0% of the 221 PRB worldwide signatories are based within OIC member states despite the OIC member states having a collective population of over 1.82 billion (24% of the total world population).
- Of the 61 countries containing PRB signatory organisations, 13.1% are OIC member states.
- Within the 8 OIC members states that contain PRB signatories there are 22 signatory organisations, located in Africa (50.0%), Europe (27.3%) and Asia (22.7%).
- 38 PRB signatories offer Islamic finance products and services, which equates to 17.2% of all PRB signatories.
- The majority of Islamic finance institutions that are PRB signatories, 27 of the 38 organisations, are based outside OIC member states, across Europe, Asia, Africa, Oceania and the Americas.
- Only 3 of the 38 institutions offering Islamic finance products or services are fully Shariah-compliant, namely Al Baraka Banking Group (Bahrain), Gatehouse Bank (UK) and Jaiz Bank (Nigeria).
- The most popular Islamic product / service offered by non-OIC member states signatories is corporate finance, with 40.7% of signatories offering this. Amongst OIC member states the most popular product / services are personal banking and personal, business and corporate banking, at 27.3%.
PRB signatories are currently underrepresented in OIC member states, suggesting the PRB should increase its activities within OIC member states. Awareness of the PRB in OIC member states could be increased through working groups, targeted awareness and outreach activities. Given the mutual benefits of becoming PRB signatories to both Islamic finance institutions and the responsible banking industry, increasing engagement should be treated as a priority.
UKIFC experts quoted in Chartered Banker Magazine article 'Progressive Pakistan'
The Islamic Republic of Pakistan is by most standards a young country – its founding in 1947 was not without both complication and conflict, and historical political divisions have frequently laid obstacles in its mission to forge a path as an influential and modern Islamic republic. Today, however, the impact of decades of globalisation – along with economic growth across South Asia – puts the country in a strong position, most significantly demonstrated by its increasingly dynamic banking and finance sector.
This article originally featured in the Spring 2021 edition of the Chartered Banker Magazine - click here to download
As the world’s fifth most populous state, Pakistan is nothing if not a significant player in the South Asia region. Its current economic indicators do, however, tell a story of a country that up to now has been relatively slow to develop in its infrastructure, health and education, and business environment.
The hesitant pace of growth and development can be viewed through the lens of a challenging domestic political scene that saw the country struggle until recently to establish a more stable democracy. However, Pakistan has benefited from structural reforms in recent years that have injected new impetus into its continuing transformation as a modernising republic.
A $6.3bn cash facility from the International Monetary Fund (IMF) in 2013, for one, was designed to help Pakistan stabilise its public finances and address energy supply shortages, and measures to attract much-needed foreign investment brought inflows of $3.1bn in 2019-20 – of which the financial sector was the second-highest beneficiary.
Despite some bumps in the road, the positive consequences for banking and financial services in the country are now being felt across the board in Pakistan. The country’s central bank, State Bank of Pakistan (SBP), notes the progress made in financial inclusion across such a vast population, saying: “In June 2018, we had 64 million unique accounts in operation, which reflects a penetration of more than 50% of Pakistan’s adult population. As of June 2020, we now have 73 million unique accounts, of which 61% are active.”
These accounts are a mix of traditional branch accounts and digital/mobile platforms – the very territory that is ripe for further expansion. And, given that the Pakistan Telecommunication Authority (PTA) reports some 93 million citizens as having broadband access, the potential for further penetration looks promising.
It could be cited that there are three ways in which the country’s financial sector has managed to blossom under such a transformative environment for banking worldwide. A key piece in the jigsaw is the autonomy that SBP now enjoys in making vital monetary policy decisions. The reforms go back to 1994, with further powers being subsequently granted in 1997.
“The changes in the State Bank Act gave full and exclusive authority to the State Bank to regulate the banking sector, to conduct an independent monetary policy, and to set limits on government borrowing from SBP”, which had been enacted in the SBP Act 1956. “SBP formulates and monitors monetary and credit policy, and in determining the expansion of liquidity, it takes into account the Federal Governmentʼs targets for growth and inflation that the Bank [operates] in a manner consistent with these targets.”
Secondly, the momentum for digitisation in Pakistan means increasing the share of online banking, whether that includes retail point-of-sale payments or opening and using e-wallets issued by FinTechs. SBP has capitalised on the digital shift by collaborating with the Pakistani government to allow its citizens living abroad easy access to retail investment opportunities back home by launching the Roshan Digital Account (RDA).
“During the past four quarters, the number of registered mobile phone banking users increased by three million to reach8.9 million.”
Institute of Bankers Pakistan
But perhaps a most prominent characteristic of the financial sector here is the growth and development of a highly developed alternate – or Islamic – banking system.
The Islamic banking impact
As an Islamic republic, Pakistan is strategically and culturally well placed to develop Islamic finance products. It is one of the very few jurisdictions to enjoy explicit constitutional support for it, and this in turn has increased incentive and backing for its development from the state.
According to SBP, the government has used a number of legal and regulatory initiatives to help nurture Islamic banking. As part of the National Financial Inclusion Strategy, it is determined to increase the share of Islamic banking to 25% of the banking industry, and its branch network to 30% by 2023. SBP has enjoyed a pivotal role in promotion and development of the Islamic banking industry and, as a result, is recognised today as a stable and resilient segment of the overall sector.
Although often seen as niche banking instruments, Pakistan has been cannily nurturing a sub-sector of Sharia-compliant* products and services since the early 1980s, with the result that it has grown substantially in both appeal and reach.
SBP reports 22 Islamic banking institutions operating in the country, including “five fully fledged Islamic banks, one specialised bank and 16 conventional banks with Islamic banking branches”. In the financial year ending 2020, a further 361 branches were added to a network already spanning 3,274 branches in 122 districts. Lower-income citizens are also are part of the commitment to growth, with banks such as NRSP and MCB-Islamic offering a range of Islamic microfinance solutions.
S. Fahim Ahmad, a Karachi-based Senior Adviser to the UK Islamic Finance Council (UKIFC), has more interest than most in the positive impact of Islamic finance. A former senior banker with Citibank and passionate supporter of sustainable charities, he was asked to set up Pakistan’s representation to the Global Islamic Finance UN SDGs Taskforce, which aims to ensure that it can actively engage with the 17 UN Sustainable Development Goals (SDGs) and make Islamic finance part of this global initiative.
“The team at State Bank of Pakistan were easily convinced of the benefits of such a cause,” he explains. “They had never done this before, as their role is more that of a regulator. But they are ina position to manage the banks much better than I could.”
In November 2020, the Pakistan chapterof the Taskforce was launched, enrolling the support and participation of seven Islamic and conventional banks which it was felt could best drive forward the mission. Its four key objectives include enhancing engagement with the UN SDGs – but also to promote Principles of Responsible Banking (PRB); facilitate alignment tools that deliver on additional areas such as green financing and the Global Ethical Finance Initiative (GEFI); and share international experiences.
“This collaboration between SBP and UKIFC is a novel concept,” continues Ahmad. “The idea is to replicate this in other markets. We have had to catch up in many respects with developed Islamic finance markets, and this is a good chance to make up for that.”This level of engagement is a far cry from the early days when legal issues tended to slow the growth of Islamic banking in Pakistan.
Finally, after 2000, the founding of the country’s largest Islamic bank, Meezan, was made possible when the SBP agreed to scope out proper guidelines and a regulatory framework. Today, Islamic banks in Pakistan are so successful, they have a surplus of liquidity, which inevitably needs to find a home in investment instruments that are considered halal (permissible or lawful).
“There’s no doubt in my mind that there’s a huge demand for Islamic finance products,” adds Ahmad. “The impact of wider regional change in 1979-1980 had fundamentally changed the relationship we have since had with Islam, and the younger generation is, by extension, now more into Islamic banking.
”However, there is still no global uniformity among Sharia scholars about the acceptability of different products – and there is extensive room for growth yet. What will make Islamic banking take off in Pakistan? Ahmad argues that this will happen if the government uses it on a large scale, for example through sovereign or corporate bonds in sovereign sukuk.
“Social good is a key part of Islamic finance,” he adds. “Islamic banks hold a lot of liquidity as we know, and if they can deploy that into productive, socially impactful use, the whole economy will benefit.”
Pakistan banks on faith
A recent joint survey held by SBP and the UK Department for International Development identified an “overwhelming demand” for Islamic banking, regardless of whether or not the respondents were urban or rural. A huge majority (94.51%) came out in favour of the prohibition on interest, with 88.4% regarding contemporary bank interest as a similarly prohibited practice.Even non-banked respondents echoed the sentiment, at 98% and 93% respectively, and 62% of those who are banked would willingly pay more for Islamic banking products due to religious preferences.
As with other jurisdictions worldwide, however, the shift towards contactless and e-wallet transactions is strengthening the hand of the non-bank sector too. This has not been lost on SBP which, in 2019, responded by enabling “electronic money institutions” access to Pakistan’s payments ecosystem. It is only a matter of time before the pace of innovation injected into the sector will transform people’s payment habits across the country.
Facing the future with confidence
As the world starts to deal with the economic fallout from the coronavirus pandemic – which, in many countries, is still in full flow – Pakistan’s financial sector seems to have shown a healthy degree of resilience in the face of the shock of 2020. SBP puts this down to capital buffers put in place over the long term to strengthen the banks’ position. The higher capital adequacy ratio (CAR) of 19.5% at the end of September 2020 put Pakistan beyond the minimum local and global requirements for its banking system. Liquidity has also been uninterrupted following state interventions to support key parts of the economy during this period.
From this position of strength, therefore, Pakistan is able to focus on at least three priorities among many that will shape its financial sector into a growing force for the economy: continued digital transformation, affordable lending instruments for housing, and programmes to reduce the gender gap in access to finance.
On the digital front, the Digital Pakistan Policy and the National Financial Inclusion Strategy are two initiatives that hold promise in the battle to reduce the informal economy and make FinTechs a productive addition to the domestic market. In particular, the launch of Raast, an instant digital payment system, will be an innovative step forward in reducing citizens’ reliance on cash while making transactions cheaper.
This collaboration between State Bank of Pakistan and the UK Islamic Finance Councilis a novel concept... We have had to catch up in many respects with developed Islamic Finance markets, and this isa good chance to makeup for that.
Islamic Finance Council, UK
Long-term property lending policies – where SBP has given mandatory lending targets to banks on their housing portfolios and developers are being offered incentives – should help boost a sector badly in need of modernisation to benefit future homeowners.Third is the launch of SBP’s Banking on Equality Strategy, where a “gender lens” will be applied to the industry to ensure increased financial access for women based on a set of approved measures.
When viewed in the context of an often-turbulent history, there’s little doubting the progress made to date in Pakistan’s journey of banking and finance. The policies, commitment, and liquidity – three factors crucial to any developing economy – should herald a more prosperous and dynamic economy well into this century.
No one left behind
According to State Bank of Pakistan (SBP), women are disproportionately underserved by the country’s financial system. With only around 25% of bank accounts held in the name of women (even fewer are actually active), it has been widely accepted by government that economic development cannot be achieved without a healthier approach to reducing the gender gap. The bank has therefore created a policy entitled Banking on Equality: Reducing the Gender Gap in Financial Inclusion to ensurea manageable but proactive shift towards women-friendly business practices. The draft policy was presented in December 2020 for consultation.
The application of Maqaasid As-Shariah in achieving the UN SDGs
In simplistic terms, Maqaasid As-Sharia is defined as the “Goals of Shariah”. These encompass the 5 necessities of human existence. The preservation of: faith, life, intellect, lineage and wealth. These objectives have a great resemblance to the UN SDGs (United Nations Sustainable Development Goals). The SDGs are defined as “the world we want. They apply to all nations and mean, quite simply, to ensure that no one is left behind.”
Maqaasid As-Shariah involves realising the human well-being by enhancing welfare or benefit (maslaha) of the people on one hand, and preventing harm (mafsadah) on the other. The satisfaction of these needs is a basic human right and has been addressed under the generic term “Maqaasid As-Shariah”.
Although the SDGs have not been developed on a religious basis, most goals are nonetheless aligned with the spirit of Islamic law! Muslims are duty-bound by their religion to ensure the sustenance of the 5 necessities of Maqaasid As-Shariah. This means that the Islamic development is endogenously sustainable since preservation of life is an explicit objective of the Islamic law.
The dimensions of SDGs (the 5Ps) can also be found in Maqaasid As-Sharia as follows: People (Intellect), Planet (lineage), Prosperity (wealth), Partnership (faith) and Peace (life). When we talk about Maqaasid As-Shariah we are really talking about a guiding framework, a value system, the objectives of which are explained from the holy Qur’an. Some of these are referenced below:
- No Poverty, Zero Hunger, Decent work and economic growth (SDG1, 2 & 8)
[Chapter 16 v 97: “Whoever works righteousness, whether male or female, while he (or she) is a true believer verily, to him We will give a good life (in this world with respect, contentment and lawful provision)…”]
- Good health and well-being (SDG 3), Quality Education (SDG 4), Clean water and Sanitation (SDG 6)
[Chapter 7 V 160: “…Eat of the good things with which we have provided you…”]
- Gender equality (SDG 5)
[Chapter 49 v 13: “We have created you from a male and a female….Verily the most honourable of you with Allah is that (believer) who has at taqwa (piety)…”]
- Affordable & Clean Energy (SDG 7), Climate Action (SDG 13)
[Chapter 7; V85: ““…and do not mischief the earth after it has been set in order…”]
- Industry, Innovation & Infrastructure (SDG 9)
[Chapter 13 v 11: “…Verily, Allah will not change the good condition of a people as long as they do not change their state of goodness themselves …”]
- Reducing inequality & Peace, Justice & Strong Institutions (SDG 10, 16)
[Chapter 4 v 135: “Stand out firmly for justice…”]
- Responsible consumption & Production (SDG 12)
[Chapter 7 v 31: “…eat and drink but waste not in extravagance…”]
[Prophetic advice: “The food of one person is sufficient for two, the food of two people suffices for four people and the food of four people suffices for eight”]
- Sustainable cities & Communities (SDG 11)
[Chapter 8 v 46: “…do not dispute (with one another)…”]
- Life below Water (SDG 14), Life on Land (SDG 15)
[Chapter 30 v 41: “…Evil has appeared on land and sea because of what the hands of men have earned (by oppression and evil deeds)…”]
- Partnerships for the goals (SDG 17)
[Chapter 5 v2: “…help you one another in virtue, righteousness and piety (common good) but do not help one another in sin and transgression…”]
The UN SDGs are primarily intended for the well-being of human beings. As sustainable development strives for a balanced economy, society and environment, Islam too drives a balance between the 3 to maintain efficient and effective resource usage. If spirituality becomes a way of life upholding timeless moral, ethical and human values, sustainability is certainly assured and Maqaasid As-Shariah to serve as governance framework, guidelines and values.
The adaptability of Islamic Finance (IF) post Covid-19 - AAOIFI
During the recent AAOIFI webinar that took place on the 14th December 2020, much of the discussion was around the adaptability of Islamic Finance (IF) post Covid-19. The COVID-19 pandemic is an event which has provoked unprecedented reflections and shifts within the sector.
Many countries fell into economic depression despite government and central bank support, with supply chains, currencies and SMEs all affected. However, the pandemic also accelerated the set-up of the digitalisation trend - from the creation of blockchain technology platforms where users could mobilise funds in a transparent manner, to online banking, online schools, virtual meetings and more.
A study conducted by some of the participating banks in Turkey revealed that the pandemic presented some strengths where clients were giving priority to Murabaha debt to continue financing their business operations and there were no dealings in any derivatives instruments. It was also an opportunity for widening the distribution channels and increasing the number of customers. On the more challenging side, the contraction in economic activities caused a cash shortage in companies and where participating banks were not able to lend a helping hand. Participating banks had limited number of instruments for consumer credits.
In an Islamic Economic system, the gap between the real and financial sectors is non-existent. While the financial sector can move independently from the real sector (which is what happened during the financial meltdown of 2008, when profits were being made while the real economy shrank). It is evident that reform in IF is needed, and there is a huge opportunity for the industry to re-inject returns into the real economy towards the creation of employment and promoting real businesses. On the other hand, financial innovation relating to the environment such as green financing and sustainable financing is encouraged by the Maqasid Al-Shariah.
In this current climate the role of regulators is more imminent than ever in providing guidance & the necessary educational tools to Islamic Banks (IB) and the industry, especially where many Central Banks have failed to abide by Standards that are pillars to the economy. IFSB for example are working in line with Regulators in an attempt to bring together uniformity and good guidelines in the IB sector. The pandemic is placing enormous strains on corporate cash flows as business operations have temporarily ceased.
Banerjee et al (2020) estimate that 50% of firms in 26 advanced countries do not have enough cash to cover total debt servicing costs over the coming years. Some guidance for governance during the pandemic included:
- Board & executive directors are recommended to implement crisis management plans. Such crisis management plans should cover reporting practices and governance issues.
- Boards are recommended to emphasise stakeholders’ needs and ensure transparent reporting of transactions arising due to the pandemic (moratorium payments).
- Boards are recommended to emphasise ethical considerations while developing strategies to handle the pandemic.
- Sharia boards are advised to develop pro-active measures to ensure sharia compliance.
Some opportunities for IFIs included:
- Social safety net – IFIs need to develop fiscal plans for a sustainable future.
- Islamic Social Finance tools – e.g. Qard Hassan, Sukuk, Waqf, Zakaat are available for IFIs
- Fintech (Mobile banking, Sharia compliant crowdfunding, Islamic micro finance & smart contracts).
Omar Shaikh delivers virtual lecture to World Muslim Communities Council
UKIFC Managing Director Omar Shaikh delivered a virtual lecture with the World Muslim Communities Council, on Saturday 5th December 2020. Entitled "Moral Economy and Green Recovery After Covid-19: Islamic Awqaf and Finance", the lecture affirmed that Islamic finance is moral financing and a means to carry out community activities and achieve human happiness.
He added: “Islamic finance is a financing product that has a clear structure and focuses on alignment and avoids usury, because it is a green economy that achieves recovery with returns, social benefits and blessings in money, as well as it provides solutions to global challenges.”
He explained that in the face of the outbreak of the epidemic, we must seize opportunities for Islamic finance and endowments, as there are several challenges facing financing operations and traditional bank shares such as supply chains. He is stressing that the demand for products for the benefit of societies has led to an increase in profits and reduced costs for banks.
He called for a focus on ethical economics and sustainable banking through investment in markets and Sharia governance, as well as on sustainability goals by contributing to the eradication of poverty and achieving gender equality, by harmonizing Islamic finance. He is calling for rebuilding a new system of Islamic finance based on human welfare and serving the society.
During the lecture, Omar pointed out the experience of the countries of Scotland and the United Arab Emirates in being among the first countries that cared about the happiness of the individual to achieve emotional intelligence.
The World Muslim Communities Council is an international non-governmental organization, headquartered in the UAE capital Abu Dhabi.
Second Islamic Finance & SDG Taskforce meeting takes place
The second Islamic Finance and the UN Sustainable Development Goals (SDGs) Taskforce meeting has taken place virtually bringing together over 50 global Islamic finance leaders. At the meeting, convened by the State Bank of Pakistan (SBP) in partnership with the UK Islamic Finance Council (UKIFC), the SBP announced the launch of a country level working group bringing the leading banks across Pakistan to focus on green finance and the SDGs. Two further working groups, to be driven by Taskforce members, focused on Disclosure and Reporting and Education and Awareness were also announced.
The Taskforce is playing a leading role to encourage the adoption of the SDGs, highlight the green finance opportunity and promote the UN Principles of Responsible Banking within the global Islamic finance sector. This represents a $2.5 trillion global investment opportunity as part of the post-Covid-19 economic recovery. The Islamic Development Bank suggest that between $700m and $1trillion of this is within its member countries presenting an immediate opportunity for Islamic finance institutions.
State Bank of Pakistan Governor, His Excellency Dr. Reza Baqir, announced the launch of a Pakistan country working group that will:
“Explore the inherent strength of Islamic finance to develop a responsible business framework by engaging academia, policy makers and practitioners towards achieving SDGs.”
Leading the Awareness group UKIFC Advisory Board Member and meeting chair, Richard de Belder commented:
“Having identified a knowledge gap this working group will focus on activities that increase awareness, promote understanding and encourage adoption of the SDGs amongst the global Islamic financial and their related primary stakeholders.”
Leading the Disclosure and Reporting working group Gatehouse Bank CEO Charles Haresnape added:
“This working group is a unique opportunity to bring the Islamic banks signed up to the UN Principles of Responsible Banking together to share experiences with a view to developing a more consistent approach to disclosure and report.”
Despite a natural alignment few Islamic financial institutions are engaged with the SDGs. As we enter the decade of delivery the Taskforce has become an important platform to raise awareness of the Global Goals and catalyse practical action amongst Islamic financial institutions.
The meeting, also heard from Dr Hayat Sindi, Senior Advisor to the President, Islamic Development Bank, who spoke about how Islamic financial institutions are demonstrating resilience as world events continue to reshape the landscape of global financial services; how IFI’s can prepare themselves for the opportunities and challenges posed by such a changing economy; and especially with regards to investing in science and innovation so poorer countries can provide an adequate response to the Fourth Industrial Revolution.
NOTES FOR EDITORS
About The Taskforce:
With assets expected to reach US $3.8 trillion in 2022, Islamic finance is one of the fastest growing sectors in the global financial industry. Achieving the 17 Sustainable Development Goals (SDGs) agreed in the UN’s 2030 Agenda for Sustainable Development will take over US$5 trillion per year investment with the current financing gap standing at around $2.5 trillion per year.
The purpose of the taskforce is to explore the role the Islamic finance industry can play in addressing this funding gap and to better understand the commercial opportunities the SDGs present for the sector.
The UN’s SDGs are the blueprint to achieving a better and more sustainable future for all, addressing issues such as climate change, education and equality. Achieving the SDGs requires a coordinated global effort with Governments and private sector, including the financial services sector as a whole. Analysis indicates there is limited engagement by the global Islamic finance sector and this focused taskforce has been established by the UKIFC.
Why Islamic finance in the UK is not realising its $3trn potential (Arabian Business)
Britain has failed to deliver on a government commitment to boost the sector, says UKIFC founder & managing director Omar Shaikh in an interview for Arabian Business.
The British Islamic finance market is facing a slew of challenges and is being held back by weak consumer awareness, according to one of the country’s top experts.
The $19 billion market is also suffering from a lapsed government commitment and a lack of regulation, said Omar Shaikh, an advisory board member for the Islamic Finance Council UK (UKIFC) in London.
“There is a need for the government to realise its previous legislative commitments – former UK prime minister David Cameron said every government needs to consider Islamic finance loans,” Shaikh told Arabian Business.
“The Bank of England still needs to deliver on its pledge to create a liquidity tool for Islamic finance so it can operate on a level playing field.”
In October 2013, the then UK PM Cameron announced that London would assume a position of significance in the Islamic finance market. The leader said he wanted “London to stand alongside Dubai as one of the great capitals of Islamic finance anywhere in the world”.
The UK capital now has more than 20 international banks operating in Islamic finance – five of which are fully Sharia-compliant. London is also home to more than 20 law firms that are supplying legal services relating to Islamic finance for global and domestic markets.
Islamic finance mechanisms have been used to finance a range of iconic London projects, like The Shard, the Olympic Village, and the redevelopment of the Chelsea Barracks and the Battersea Power Station sites.Today the number of institutions in the UK offering Islamic finance is double that of similar institutions located in the US, but there is still much more to be done, according to Shaikh (pictured below).
“The UK government has previously mooted an Islamic finance start-up loans facility – a SME working capital fund – but this hasn’t been executed yet,” he said.
The UKIFC expert added that Brexit could offer opportunities for unlocking Islamic finance regulation.
“We were previously locked in around EU laws,” he said. “Islamic finance couldn’t issue unsecured lending – this is a consumer credit issue that can now be resolved. The government’s commitment to Islamic finance liquidity tools needs to be realised.”
Second sukuk
However, Shaikh welcomed the news that the UK is inviting banks to join a syndicate for the country’s second sale of sovereign sukuk or Islamic bond later this year.
Britain became the first Western country to issue an Islamic bond in 2014, raising £200 million ($260 million) from a five-year deal that was 10 times oversubscribed.
“There is a potential massive $3 trillion UK market to be realised for the Islamic finance industry but UK sovereign sukuk is not yet in sufficient supply,” Shaikh said. “With a deeper sukuk market, we can be a key developer and enabler for ISAs, pensions and so on. If you don’t have enough sovereign debt, how can you create a balanced pension scheme? We need to get on with the commitments already made and the next steps.”
Growing Muslim population
The UK’s large Muslim population has played a role in helping to establish London as the focal point of Islamic financial services in the West. About 4.5 percent of the British population is Muslim, according to the 2011 census. More than a million of the UK’s 2.8 million Muslims live in London.
According to Mohammed Khan, UK Islamic Finance leader at management consultants PwC, there is a demand for ethical Islamic finance products where people can "save, invest, buy a house, and have some kind of protection".
“The Sharia structure itself doesn’t prevent the creation of these products, nor does it make them necessarily more expensive,” Khan told Arabian Business. “Generally Islamic retail products have yet to be created on a mass-market scale with equivalent competitiveness and accessibility [to mainstream finance].
Shaikh said the national Islamic finance product portfolio could be expanded to act as a fillip for the market.
“We are still at a very nascent stage, we need to develop these products – it’s a supply-driven market,” said Shaikh. “There’s no car finance, no travel insurance, no asset finance for businesses, no personal loans and no home insurance,” he said.
“Islamic finance has been a great source of FDI for the Shard and the Chelsea Barracks, for example, but there remains an opportunity to up the game beyond iconic buildings as we come out of Brexit.”
Although a host of Islamic lending or savings accounts have been launched in the UK market, only 54 percent of Muslim consumers have tried any of them, according to the 2019 Islamic Finance Consumer Report from Britain’s Gatehouse Bank.
Shaikh said the best way to raise awarenss of Islamic finance in the UK is for the industry to bring out more products.
“The awareness has to be coupled with new products. We need to catalyse the convergence of Islamic finance with ethical finance, there is an opportunity to align with the strong momentum in that space,” he said.
“You have to have good service, availability and value for money – just being Muslim-friendly finance is not good enough.”
5 Things We Learned:
- The $19 billion market UK Islamic finance market is being held back by lapsed government commitment, as well as a lack of regulation and weak consumer awareness.
- London has more than 20 international banks operating in Islamic finance – five of which are fully Sharia-compliant.
- Islamic finance mechanisms have been used to finance a range of iconic London projects, like The Shard, the Olympic Village, and the redevelopment of the Chelsea Barracks and the Battersea Power Station sites.
- The UK government is inviting banks to join a syndicate for the country’s second sale of sovereign sukuk or Islamic bond later this year.
- The national Islamic finance product portfolio needs to be expanded to act as a fillip for the market.
UKIFC supports Ethical Finance 2020
UKIFC was proud to be s upporter of Ethical Finance 2020. The annual summit, organised by the Global Ethical Finance Initiative, was held virtually for the first time in 2020 on the new EFx platform. The 4 days of the summit saw leaders from across finance participating in discussion on ethics, responsibility and sustainability in banking, investment, insurance, regulation and more.
Figures at the summit included H.E. Dr Bandar Hajjar, President of the IsDB, Eric Usher, Head of UNEP FI, economist & author John Kay, Rafe Haneef of CIMB, Richard Curtis, filmmaker & campaigner, Alison Rose, CEO of NatWest Group, Hasan Aljabri, CEO of SEDCO Holding Grouo, Samer Abu Aker, CEO of SEDCO Capital, Nigel Topping, the COP26 High-level Climate Action Champion, and Maunel Pulgar-Vidal, President of COP20.
Videos from all of the sessions are available now on YouTube.
Brexit brings risks and opportunities for UK Islamic finance but unlikely to revolutionise domestic industry, say experts
Article published by author: Hassan Jivraj
Publication name: Salaam Gateway
Date of publication: 16 JAN 2020
Article link: Click here
The United Kingdom is set to leave the European Union (EU) on January 31. Uncertainty looms as to whether the government will secure a trade deal with the EU or leave in December 2020 without one.
Nonetheless, Brexit presents various risks and opportunities, such as Islamic finance playing a role in bilateral trade negotiations and the UK’s second sovereign sukuk. Beyond these, it is unlikely it will significantly transform the industry in the UK, according to stakeholders polled by Salaam Gateway.
DEAL OR NO DEAL
The biggest uncertainty surrounding Brexit is whether the UK government will be able to secure a Free Trade Agreement (FTA) with the EU, or if it will leave the bloc without a deal.
The risk of a no-deal would have a negative impact on the UK’s conventional and Islamic banking sector.
“Impacts and shocks in the UK economy will obviously also impact the Islamic economy,” Nick Green, Partner and Head of Cross-border Investment at law firm Trowers & Hamlins in Dubai, told Salaam Gateway.
“If we have a No-Deal exit from the EU, the short-to-medium term impact on the economy will not be positive, although I think it will be flat rather than a deep recession,” he added.
Among some of the risks of leaving the EU without a deal is losing the passporting scheme, which allows financial institutions in the bloc to operate, and sell financial products and services in member states without having to apply directly to specific regulators.
“If the EU passporting scheme falls away it will be more difficult to set up banking operations in other EU countries but there is no evidence to suggest UK Islamic banks are looking to set up in the EU outside the UK,” said Chris Tait, Project Manager, Islamic Finance Council UK (UKIFC).
But Mohamed Damak, Senior Director, Global Head of Islamic Finance at S&P Global Ratings downplayed the risks of Brexit’s impact on UK Islamic banks.
“There is no significant linkage between Brexit and the competitive position of domestic Islamic banks in the UK,” he said.
“Islamic finance remains small in the UK with total assets of the Islamic banks at £4.5 billion at Year-End 2018.”
FDI DRIVER
In a post-Brexit environment, it is likely the UK government will seek new trading partners and relationships. Islamic banking and finance can play a role in attracting foreign direct investment (FDI), particularly with Muslim-majority nations.
From his vantage point in the UAE, Nick Green said that to date, most Gulf investors have generally viewed Brexit as a negative.
Middle Eastern investment into the UK is not unsubstantial, from £1.8 billion in 2016 it rose to £2.43 billion in 2017 and £2.6 billion in 2018, according to real estate services provider Savills.
With regards to the government’s position, a UK Treasury spokesperson told Salaam Gateway: “The government remains committed to developing Islamic Finance in the UK to support financial inclusion, encourage investment and enhance its competitiveness as a global financial centre.”
The UK’s five licensed Shariah-compliant banks all have significant shareholders from overseas, notes Stella Cox, Director of DDCAP Group and Chair of TheCityUK’s Islamic Finance Market Advisory Group.
All of the UK’s Islamic banks are majority-owned by Gulf-based financial institutions or investors. For example, Al Rayan is owned by Qatar’s Masraf Al Rayan. Similarly, Kuwait’s Boubyan Bank, previously the majority shareholder of Bank of London Middle East (BLME), acquired the lender in an all-cash takeover in December 2019.
“We have Islamic fund managers and insurance companies. Emerging technology businesses focused on Islamic financial sector opportunities, and also those within the wider halal economy are attracting foreign investors,” said Cox.
BANKING
While Brexit will present challenges for conventional and Islamic banks in the UK, it will also depend on the bank’s business line and how exposed financial institutions are to the EU.
Charles Haresnape, CEO of Gatehouse Bank said the bank does not trade across borders and that the impact of Brexit is much less than for UK banks which trade internationally.
“Any impact for us would be if customer demand for home finance reduced when customer appetite to purchase UK property contracted. We see this as a low risk given the historical resilience of the UK housing market,” he said.
“All things considered we believe the potential for an adverse impact on Gatehouse Bank from Brexit is low.”
From a growth and profitability perspective Mohamed Damak of S&P said asset quality and earnings of UK Islamic banks could be hit due to the significant concentration of their lending portfolio on real estate activities in case of a disruptive Brexit.
He noted around two thirds of total financing comprised real estate exposures at year-end 2018. But he said these banks enjoy a good level of capitalisation and asset quality indicators.
“At the end of 2018, the average Tier 1 ratio for UK Islamic banks stood at 17.9% and their NPLs ratio at 1.3% according to the Islamic Financial Services Board,” he added.
At present, Al Rayan is the only fully-fledged retail bank out of the five Islamic banks in the country.
Despite the small number of players and with the UK seeking to attract more Islamic investors, it is unlikely a new Islamic bank will be set up anytime soon.
“I don’t see appetite for a new Islamic lender to enter the UK at the moment,” said Nick Green.
“It is also unlikely that GCC financial institutions will set up a large presence in the UK. Instead, GCC investors looking to enter the market are more likely to acquire companies or existing financial institutions.”
However, he said there is potential space for the challenger banks to offer Islamic financial products, if they wish to expand their product line.
CAPITAL MARKETS
This year the UK is set to issue its second sovereign sukuk, which will help London maintain its position as a centre for Islamic finance.
“The UK’s second sovereign sukuk issuance is a key part of this strategy: supporting UK-based Islamic banks through the provision of high-quality, Shariah-compliant, liquid assets; encouraging the growth of the domestic Islamic finance industry and helping ensure the UK maintains its position as the leading Western hub for Islamic finance,” the UK Treasury spokesperson told Salaam Gateway.
The deal will follow the maiden sukuk issued by the government in 2014 when the sovereign became the first outside of the Islamic world to issue such an instrument.
In the following year, UK Export Finance (UKEF), the government’s credit export agency (ECA), guaranteed Emirates Airline’s sukuk to buy aircrafts.
However, there has been little activity in sukuk since then. The most recent Sterling-denominated sukuk came in February 2018 from Al Rayan Bank that issued a debut £250 mln sukuk, which followed a Shariah-compliant equivalent to a residential mortgage-backed security (RMBS).
Beyond the upcoming sovereign issuance, the pipeline of sovereign or UK corporate sukuk is likely to be limited due to cheap domestic funding.
“I don’t envisage UK companies will look at sukuk because domestic finance is plentiful, unless there is a Middle East element such as in the corporate ownership,” said Nick Green.
“It’s still cheaper to do conventional or direct lending. It tends to cost on average around 50bps to 100bps more for the UK’s Islamic banks to offer lending compared to conventional lenders, depending of course on size and purpose of facility.”
On a more positive note Bank of England is currently working on a facility for Islamic banks to help with their liquidity requirements, according to Wayne Evans, Adviser International Strategy for TheCityUK.
“This is a welcome development, as was the Bank’s decision to become an Associate member of the Islamic Financial Services Board,” he said.
INSURANCE
Another area that UK will likely seek to develop is the domestic takaful sector.
Stella Cox believes Lloyds of London is interested in promoting takaful and other Islamic insurance products and services.
In 2018, the Islamic Insurance Association of London released guidelines to address capacity constraints and challenges for takaful and re-takaful with the aim of supporting the sector. The guidelines followed the initial set released in 2016.
“The Islamic Insurance Association of London works under the auspices of the Lloyds platform and is seeking to ensure that the market operating environment is sufficiently enabled for Shariah-compliant business to grow further,” she said.
“Overseas investors have shown interest in establishing Shariah-compliant syndicates and we have a Shariah-compliant insurance underwriting agency within Lloyds. Lloyds members offer a range of Islamic products and services across a range of assets and requirements.”
But others say the scope for development in the UK is limited.
“The takaful industry remains small globally and even if we start to see some growth in the UK, we are of the view that it will remain rather small in absolute terms and relative to the insurance industry in the UK,” said Mohamed Damak.
He points to a lack of appetite from clients, lack of standards and also perhaps a lack of offering by the main insurance players.
“As in other markets, takaful companies will need to develop competitive products and do a better job in promoting their offerings/differentiate themselves from conventional insurers in order to grow,” he said.
WINNING OVER MUSLIMS
Irrespective of Brexit, there are still long-standing challenges that will continue to face Islamic banking in the UK, particularly the retail sector.
Shakeel Adli, Partner, Head of Islamic Finance at CMS Law, said the take-up of Muslim consumers has been relatively low. He said this in large part has been down to two factors; firstly a distrust as to whether the underlying products are in fact Shariah-compliant and secondly the pricing arbitrage with conventional products.
“More generally there needs to be greater financial literacy both amongst Muslims and non-Muslims for consumers to be able to make informed decisions,” he said.
He argues that where Islamic products have been particularly successful is when they have outcompeted the conventional market and as such have been able to attract both Muslim and non-Muslim customers.
He cites the examples with savings products in the UK where a number of the UK Islamic banks have offered higher rates than their conventional competitors whilst still allowing customers to benefit from the Financial Services Compensation Scheme.
MOVING FORWARD WITH SDGs ALIGNMENT
As Brexit Day approaches, the picture for UK Islamic finance remains mixed.
However, there are other initiatives taking place.
Chris Tait said the UKIFC recently launched a high-level Islamic Finance and Sustainable Development Goals (SDGs) task force that is supported by the UK Government and includes international stakeholders.
“The taskforce will enhance the engagement of the global Islamic finance industry with the SDGs through capacity building, awareness campaigns and promotional activities,” he said.
“Whilst not driven by Brexit it is a good example of the UK leading a global initiative aimed at leveraging Islamic finance to deliver the Global Goals.”