London’s mass popularity as a hub for Islamic finance emerged in 2013 when then-Prime Minister David Cameron unveiled plans to develop the British city into the Western capital of Islamic finance.
In 2014, London took a step further when Britain became the first country outside the Islamic world to issue sovereign Sukuk, the Islamic equivalent of a bond.
The United Kingdom Sukuk bond sale was widely seen as a success as it attracted £2.3bn in orders from central banks, sovereign wealth funds, and other institutional investors. As part of the strategic plan, in 2015, the United Kingdom guaranteed a Sukuk bond issued by airline company Emirates.
The key benefit of this policy was attracting additional liquidity from investors in the Middle East and Asia adhering to Islamic finance principles.
Islamic Banking in the City
Though London’s history with Islamic finance may seem very short, in fact, it dates back over 30 years, as the first Islamic bank was launched in the UK in 1982. Nearly twenty years later, the British Government removed tax barriers for Sharia-compliant products which acted as an incentive to both investors and underwriters.
As a result, in 2004, the FSA approved the first totally Islamic British bank. As of 2017, Britain has more Islamic banks and lenders than any other Western country, and apart from them, household names in banking have also launched a number of Sharia-compliant products such as individual savings accounts, deposits, pension schemes and home purchase plans.
Furthermore, in April 2017, London-based Islamic financial technology start-up Yielders has become the first company of its kind to be given regulatory approval in the UK.
London’s Key Competitive Strengths
What lies beneath this institutional interest in Islamic finance? Apart from the number of banks providing Sharia-compliant products, London has a perfect financial ecosystem – a large and highly liquid debt and equity capital market, qualified professionals – lawyers and bankers, business-oriented financial regulators and a developed market for risk management instruments such as derivatives and insurance.
The London Stock Exchange is a key global venue for the issuance of Sukuk. According to the LSE Group official website, over $48bn has been raised through 65 issuances of these alternative finance investment bonds on London Stock Exchange. Also, the London Stock Exchange includes a number of funds designed for investors complying with Islamic finance principles such as the FTSE Shariah Global Equity Index Series.
In the last few years, London has been at the forefront of innovation in FinTech areas such as cryptocurrencies, crowdfunding, payment services, etc. Some of these FinTech innovations can be combined with Islamic finance in order to produce a cheaper, faster and more personalised service to the customer. The Islamic finance market in the UK has a high potential as currently there are around 3 million Muslims living in the UK. However, most of them do not use Sharia-compliant products.
Competition from Other Financial Hubs
Centres such as Dublin and Luxembourg also have ambitions to attract Islamic financial services. Furthermore, in April this year, Saudi Arabia listed its biggest ever sharia-compliant bond, on the Irish Stock Exchange, so the competition between the Western financial centres is probably more intense than ever.
However, for now, competing financial centres are lagging behind because of their smaller markets, fewer companies which are looking to raise finance, lower number of qualified professionals and lack of experience underwriting Sharia-compliant big-ticket financings.
One thing is for sure: if London wishes to keep its leading position in Islamic finance, the city needs to keep its flexible immigration laws and focus on attracting foreign issuers and financial infrastructure development.