Islamic Finance: The European Experience
Introduction
This chapter addresses how the United Kingdom surfaced on the face of the Earth; both as the hub of the Islamic Finance of the European continent and a major center of Islamic finance in the Western world.
It also encompasses the development of Islamic finance in UK, the numerous reasons for it progress and development, and its historical development from 1996 till the present times. One of the major reasons is the governmental consideration. Islamic finance is regarded to be one of the most imperative measures to attract foreign fund for investment in UK. Also, it is to promote London as an important and central financial center on a global level.
On 29th Oct, 2013, the Prime Minister of UK, David Cameron, made a groundbreaking announcement at the World Islamic Economic Forum (WIFE) in London. He assured that the UK will become the first non-Muslim country to issue an Islamic Bond. Cameron administration did so believing that Islamic finance is a grand opportunity for the country to exploit and advance its financial services industry.
Cameron said, “I don’t want just London to be great for Islamic finance in the Western world; I want London to stand alongside Dubai as one of the Islamic finance anywhere in the world” (BBA-News). Similarly, Mr. Edward Lister (Deputy Mayor of London) held a press conference in Kuala Lumpur on 23rd October, 2013. He was reported saying: “We want to be the leading (Islamic) finance sector outside of the Muslim world”. Thus, this chapter will present information concerning the global industry in the Islamic countries. Furthermore, it will also offer an analysis of the probable economic outcome of the Islamic finance.
There is no doubt that it has become extremely important to become a part of the 1st world non-Muslim countries. The competition has become so intense and such a position could be highly effective for the country’s development and to obtain benefits from Islamic finance for advancing infrastructure projects. The chapter will also discuss the future in Global Economy and the impact on Europe.
Development of Islamic Finance in UK
The United Kingdom has been serving as a chief Islamic Financial Services provider for the last three decades whereby the government has created a concrete fiscal and regulatory framework to encourage the growth of Islamic finance. According to the UK Islamic Finance Secretariat, the world market was worth around $1.3 trillion by the end of 2016. The total value of Sharia compliance assets has grown by 150% since 2006. It needs to be considered that the United Kingdom is the leading western country and Europe’s premier center. As a matter of fact, it possesses $19 billion of reported assets.
More than 20 international banks operating in the country offer Islamic Finance
6 banks are fully Sharia compliant
The global Sukuk issuance was US$ 4303 billion in 2012 (1st quarter)
Islamic Finance is used in infrastructure projects in UK such as Olympic Village, redevelopment of Chelsea Barracks, and Ballersea Power Station
The country has more than 25 law firms that supply legal services rotating to Islamic finance (for the same accountants, consultants, and professional services)
Almost 10 renowned educational institutional (universities and business schools) across UK have established regional centers of excellence in the field of education.
London stock exchange is the key global venue for the issuance of Sukuk and has successfully raised US$ 34 billion
UK encourages banks to establish Sharia-compliant products. This is executed through the utilization of a fast force with the aim to position London as a global hub for a fast-growing Islamic finance sector (expected to reach US$ 2.6 trillion by 2017)
Reasons for Islamic Finance Growth
Reform of arrangements for issue of debt
Removal of double tax on Islamic mortgages in the country
Extension of tax relief on Islamic mortgage to companies and individuals
Development of Islamic Financial Institutions in the UK
Global Sukuk Issuance at a Record High
Sukuk issues have experienced a significant expansion in the last 4 years
High rise in Sukuk issuance recorded $109 billion during the first 9 months of 2012
Appetite for quality issuers of Sukuk from both Islamic and non Islamic investors
The country has a strong interest in the development of the Sukuk market
The Future of Islamic Finance in Global Economy
This section of the chapter includes some part of the speech delivered by the RT Hon. Baroness Wars, UK origin Commonwealth Office Minister at the Oxford Center for Islamic Studies. It explains how UK has turned out to be the hub of the Islamic finance.
It is an honor to be able to explain why in such grand surroundings and with such distinguished audience. Our world is still reeling from the effects of the economic crush. All hands are on deck as we, here in Britain, deal with the biggest budget deficits since the war. In Government, this doesn’t just pose a challenge for the Chancellor-it is Challenge for all of us. As Ministers, it is our duty to help develop greater resilience in Britain’s economy. Each of us, whatever our department, has to focus on growth because Britain’s place in the global race impacts on every single person in this country.
In my role at the Foreign and Commonwealth Office and as Minister for Faith and Communities, I see the power of economic diplomacy as well as political diplomacy. I’m proud that the FCO is a trade ambassador for the UK-and Islamic Finance form as important part of that. After all, the UK has become the Western hub for this sector – a sector which has grown despite the downturn.
It is not about making a simple pros and cons comparison with conventional banking. And it is not about developing simplistic, faith specific products that only appeal to a narrow market. But it is about increasing options, maximizing the products and services we have to offer. And, it is ultimately about making Britain the preferred choice for the Muslim world to invest in and do business with.
Secondly, Islamic finance taps into today’s appetite for ethical finance. After the financial crash-when it became clear that the link between risk and reward was broken-the absence of Riba, or interest, appeals to many more people. We have seen the archbishop of Canterbury, Justin Welby, speaks of the morality of the city being overwhelmed by a “culture of entitlement”, disconnecting it from what would be considered reasonable in the rest of the world. The Archbishop of Westminster, Vincent Nichols, has identified “a tendency for business people to feel they need to adopt a different set of values in business than those which they apply in the rest of their lives”.
Islamic finance could be a sensible, measured banking option, at a time when confidence remains low and the Government is working with the G8 to improve the transparency of financial institutions. And this is the third reason why it is an important option because we cannot simply carry on as before. We need to rebalance and diversify our economy. We need to consolidate and protect our existing position. We need to engage with new markets, products and regions.
The Global Islamic Finance Industry
300 financial institutions are managing $250 billion
15-20% annual growth
Industry is evolving & expanding both financially & geographically
Inclusive paradigm: the services are open and available to both Muslims & non-Muslims who seek ethical financial solutions
Figure 1: Global Assets
Source: OIC (2012)
1.2 Global Islamic Market: Profile
The global Islamic Banking industry is reputed as a fast-growing industry. In fact, it has emerged as a turning point to provide ‘delighted’ products and services. In this regard, a number of industry players have contributed remarkably; seeking to churn out brands and adopting ‘differentiation’ marketing strategy typified by the nature and the consumer demand.
Figure 2: Islamic Banking Assets Breakdown (100% = $1,100 Billion)
Source: A.T Kearney Analysis (2012)
Islamic Finance Economic Outcome
The abolition of interest has several economic & social consequences
Elimination of injustice and promotion of cooperation between capital & labor
Encouragement of productive enterprises for increasing productivity & employment
New competition from interested banks that offer Islamic Financial products
Equal attraction to the non-Muslim consumers and customers
Characteristics of Developing Countries
High rate of population growth
Below-average standard of living
Inequality in income circulation and distribution
Low productivity level – human & natural resources
Sustainable dependency on agricultural products and natural resources
Lesson for Developing Countries
According to Michael Ainely, there are 6 principal reasons Islamic Finance in the United Kingdom has grown remarkably.
Global Expansion of Islamic Finance
Islamic finance has grown significantly and is currently estimated to have a worth of approximately £250bn globally. The growth of the industry in the Middle East and South East Asia has also inflicted a great influence on the UK market.
London as an Old Market
Dating back to the 17th century, London has demonstrated the will to innovate and respond flexibly to new ideas. UK financial services industry has a proven record of developing and delivering new products with large pool of legal, accounting, and financial engineering skills.
Islamic Windows
The conventional banks established business lines using the Islamic products known as Islamic Windows. These ‘windows’ have significantly contributed to the expansion of Islamic finance.
Excessive Liquidity in Gulf Region
The sharp rise in oil prices during the 1990s resulted in huge liquidity surplus in the Gulf countries. The capacity of the local financial markets has been unable to acquire the said surplus. Fortunately, this demand was quickly identified by Islamic Finance in the United Kingdom.
Public Policy & Taxation
The UK government has introduced services of tax removal in Islamic mortgages & “Sukuk”.
Single Financial Regulator
The UK government established Financial Services Authority (FSA) in 1997 wherein it combined 11 different regulators into a single body under a distinct legislation. As a consequence, several complications and issues were resolved smoothly.
The Impact of Islamic Finance
The Islamic finance would inflict a great impact on the banking system in particular and on the economy in general.
It will make entry of new market and institutional players possible such as Islamic Money Market, Islamic Assets Management Companies, and Islamic Insurance & Reinsurance. The financial inclusion of sizable number of economic contributors in the economy and winning their trust will ultimately strengthen the existence and the stability of the financial system pertaining to interest free finance as it is based on Islamic Law. However, it needs to be understood that this activity is not influenced by religion. Instead, it is more of a corporate activity that is available to and accessible by all segments within the society. Therefore, non-Muslims are also encouraged and expected to participate in the discussed financial system.
Conclusion & Outlook
Opportunities for Islamic finance in UK stem from the need to fund long-term growth strategies and infrastructure projects. Similarly, it is also critical in spurring the private sector investment.
UK infrastructural requirement and project-related finances can be met through the issuance of Islamic capital market instruments such as “Sukuk’ Islamic Pond.
It is significant for the policy makers all over the world to realize and comprehend the importance of following the UK model. This decisive model has helped the country to become one of the major hubs for the Islamic finance outside the Islamic world.
Removal or reduction of tax
Introduction of the Islamic finance to all the educational institutions and to the Central Bank for the development of information; training of bank staff as well as the awareness of the general public
It is extremely essential to have standard contracts for all forms of interest-free finance, the ethical values of equality, transparency, and disclosure requirements as all such features are valuable in increasing the prospects of economic affluence and financial steadiness.
References
- HAJARA ADEOLA, LASCALA, LAGOS, 2007.
- UK Excellence in Islamic Finance, UK Islamic Finance. Secretariat-CUKIES
- Islamic Finance Magazine.
- UK reuter/article/2013/09/18/UK Islamic Finance
- www.globalislamicmagazine.com
- Adil A. Hamid, Dr.S.N.YASIN, Osaro Algbogun. Islamic Finance model for
under developed Islamic countries in Asia & Africa.
- www.todayszaman.com/news.
- Michael Ainely & Others: Islamic Finance in UK: Regulation and Challenges 2007
- www.businessdayonline.com/ng/index
- https://www.gov.uk/government/speeches/the-future-of-islamic-finance-in-a-global-economy
- www.bbc.co.uk/new/business-2472240
- Zaway Sukuk Monitor, Islamical Information
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