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Updated: Mar 27, 2021

Islamic Finance in the United Kingdom

The United Kingdom (UK) has a renowned reputation for having one of the world’s most developed and exquisite banking and financial services sectors with many institutions carrying over a century of experience.

Although the origins of Islamic finance in the UK can be traced back to the 1980’s, Islamic banking however was started in the 1990s by corporations from the Middle East (now known as GCC) who introduced Shari’ah complaint Islamic mortgages based on the Murabahah principle. With the launch of the UK’s first fully Shari’ah compliant retail bank in 2004, the UK today is considered to be a leader in Islamic finance within the western world. With over 20 banks currently offering Islamic financial products/services, the government’s own Islamic Finance Task Force and approximately 25 law firms specializing in legal services (required for Islamic finance) – the UK has one of the most developed Islamic Financial markets in the West.

Since the initial introduction of ‘Islamic mortgages’ aka House Purchase Plans (HPP) into the UK, other Islamic banking products have become available to consumers across the UK. Islamic banking products available in the UK include:- savings account, deposit account, trust accounts, ISA accounts, debit cards, commercial property finance, car finance, personal finance, Buy-To-Let investment financing and Islamic pensions.

Of the UK banks involved in Islamic finance, HSBC and Al Rayan (formerly Islamic Bank of Britain) stand out for a number of unique reasons. HSBC operates through an Islamic window, called ‘Amanah’ which was established back in 1998 as it’s Islamic banking arm. HSBC Amanah employed 300 professionals and was the largest Islamic financial services team of any international bank. In the UK, HSBC Amanah had around 3,000 mortgage customers amassing to a total of £350 million in home loans. However, during 2011 HSBC announced its restructuring plans which were designed to reduce costs and improve profitability. As part of the restructuring plans, it decided to close a large part of its Islamic banking operations. Specifically, closing of operations in UK together with United Arab Emirates, Bahrain, Bangladesh, Singapore and Mauritius.

Islamic banking would only be offered in Malaysia and Saudi Arabia with a very limited service in Indonesia. HSBC claimed that it’s withdrawal from the above mentioned markets were not purely based on profitability but the overall growth and future plans of HSBC globally.

Al Rayan bank previously known as the Islamic Bank of Britain was initially launched in 2004 and is still the only fully Shari’ah complaint retail bank in the UK. The bank is considered as a pioneer of British Islamic banking and boasts to offer the largest range of Sharia-compliant retail financial products in the UK. Al Rayan bank boasts of having over 50,000 customers however it has been through many ups and downs over the last decade. For example, in 2011, its losses increased from £5.9 million to £9.5 million. Prior to that, it had raised £7.5 million of extra capital in January 2009. In 2014, £100 million capital investment was made by its new parent company – Masraf Al Rayan (Reuters 2013). Masraf Al Rayan is the second largest bank in Qatar and is the fifth largest Islamic bank in the world. This new lease of life is expected to strengthen its product portfolio and widen its appeal to a more diverse range of customers.

With the rebranding, Al Rayan Bank, will become part of a global, banking organisation, and is aiming to build upon its own reputable history and that of the parent company too. Moving forward, the bank hopes to increase focus on corporate and real estate finance. Additionally, it will put more emphasis on developing a stronger presence in London where it’s commercial and GCC operations will be managed from. Retail banking will remain unchanged and will be headed out of the headquarters in Birmingham.

ISLAMIC FINANCE SUCCESSES IN THE UNITED KINGDOM Within the western world, the UK has emerged as the model for Islamic finance. Having drawn upon the 30 years of experience, the Islamic finance industry in the UK has developed and stabilized into a legitimate sector. To the extent that some regard London as the European gateway to Islamic finance.

Over the years, the UK Islamic finance industry has gained steady momentum and having developed the breadth of products and services, today Islamic finance providers are able to compete with the offerings of conventional financial institutions. Back in 2012 the UK was rated as the 9th largest country by Sharia compliant assets. There are a number of reasons that have contributed to this great success. In particular, support from the government, proactive role and embracement by the enterprising private sector and a relatively strong demand for Shari’a compliant banking products (from the UK Muslim population).

The advancement of the UK Islamic finance sector can largely be attributed to the government and its supportive government policies which aimed at broadening the market for Islamic products. For example, a number of key policies such as the removal of double tax and extension of tax relief on Islamic mortgages and the reform of arrangements for issues of debt have contributed to the overall success of Islamic finance in the UK. Furthermore, the current legislative framework for the Islamic banking industry that exists today has evolved primarily due to the efforts and hard work of FSA (Financial Services Authority – the UK‟s single financial regulator) and the Bank of England plus a few other institutions.

ISLAMIC FINANCE CHALLENGES IN THE UNITED KINGDOM Although Islamic finance has made great progress in the UK, the journey has been far from straight forward. This journey consists of various challenges some of which have been overcome whilst others still remain. The challenges can be separated into theoretical and operational aspects. Regarding the theoretical side, further work is needed to develop a better understanding of the core principles of Islamic economics, specifically education on the functioning of a financial system operating on a profit/loss-sharing basis and standardization – reconciling between different schools of thought with differing views.

On the operational side, issues relating to product innovation, intermediation, risk management and development of frameworks (interbank documentation, benchmarking etc.).

The above factors are in line with the HM Treasury Report issued in December 2008 which identifies the main barriers for the development of the Islamic banking and finance in the UK as taxation and regulation, standardization, awareness and skills. Islamic banking in the UK and globally has to deal with the issue of ‘liquidity management’. Principally, there is a shortage of liquidity instruments which in essence reduces returns for Islamic banks.

This is an issue and therefore there is a greater need to establish appropriate risk and liquidity management techniques. Additionally, there is concern over the supervision and compliance to Shari’a. This is an ongoing concern for not just the UK market but across the global Islamic banking industry. It is essential to have consistent Shari’a supervision. And finally, although there are over 50 programs at more than 70 educational institutions offering Islamic finance in the UK, there is a shortage in the talent pool of Islamic finance experts; those who have a solid background in Shari’a coupled with business and management experience.


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