UK Retains Crown as Western Islamic Finance Hub Despite Local Niche

Fitch Ratings highlights the significant role of London in Islamic finance while observing its domestic limitations.

London Stock Exchange: Western Islamic Finance Hub

The capital city proves instrumental in the global Islamic debt market.

On June 20, 2023, Fitch Ratings announced that the UK will retain its status as the Western epicenter for Islamic finance. A driving force behind this achievement is the government’s promotion of the London Stock Exchange (LSE) as a pivotal international sukuk listing venue. Welcome to the Western Islamic Finance Hub, a dynamic platform that bridges the gap between Western financial systems and the principles of Islamic finance, offering a comprehensive range of services and resources tailored to meet the needs of both Muslim and non-Muslim investors alike.

The UK made a landmark move in 2014 as the first Western nation to issue sovereign sukuk and bolstered its credentials with another issuance in 2017. This has been buoyed by the United Kingdom’s sizeable Islamic funds segment, as well as its highly skilled workforce, including legal and professional services adept at servicing the global Islamic finance industry. English law, which governs a significant portion of international sukuk, further adds to the country’s allure.

A Trusted Partner for GCC Investors

UK’s strong ties with Gulf countries bolster its Islamic finance sector.

Welcome to the Western Islamic Finance Hub, a dynamic platform that bridges the gap between Western financial systems and the principles of Islamic finance, offering a comprehensive range of services and resources tailored to meet the needs of both Muslim and non-Muslim investors alike. UK Islamic banks have shareholders from the Gulf Cooperation Council (GCC), including the prominent Bank of London and The Middle East plc. This association supports governmental efforts to entice foreign direct investments. The assets under management of UK-based Islamic funds amounted to USD 280.6 million as of 1Q23, marking a 2.9% increase from the previous quarter. Moreover, the London Metal Exchange is frequented by Islamic banks from various countries to facilitate cash financing through tawarruq contracts.

The Regulatory Environment: A Level-Playing Field

UK government fosters an accommodating regulatory landscape for Islamic banking.

The UK has been proactive in establishing an enabling environment for Islamic banking, with regulatory, legal, and tax frameworks tailored to suit the industry. Islamic banks in the UK are subject to the same regulatory requirements and prudential rules as conventional banks, and they fall under the purview of the Financial Conduct Authority and the Prudential Regulatory Authority. Furthermore, the Financial Services Compensation Scheme encompasses Islamic banks.

Read this: Malaysia Fast Becoming A Leading Islamic Finance Hub

Domestic Market: Room for Growth

Islamic finance faces hurdles within the UK’s borders.

Despite its global prominence, Islamic finance is considered niche within the UK. The total assets of domestic Islamic banks surpassed USD 6.5 billion at the end of 2022, accounting for a mere 0.1% of the domestic market share. Moreover, domestic sukuk issuances are scarce, and the takaful segment is in its infancy. The demand for Islamic products is hindered by a limited Muslim population, with just over 5% in the UK. Furthermore, nearly half of this population has never utilized Islamic finance products. Other challenges include limited public awareness, concerns over Sharia compliance, a small distribution network, and less diversity in product offerings compared to conventional banks. Often, Islamic financing products tend to be more expensive, which also lowers demand.

Looking Ahead: A Dual-Natured Future

UK’s global clout in Islamic finance is likely to persist, though domestic prospects remain uncertain.

Fitch Ratings expects the UK to sustain its prominence as the leading Western hub for Islamic finance in the medium term. The UK’s established international financial services industry and the government’s dedication to promoting London as an international financial center are significant contributors.

The country continues to attract investors from the GCC and numerous Organization of Islamic Cooperation (OIC) countries. However, the domestic Islamic finance landscape remains niche and must overcome several barriers to unlock its full potential. Join us today and be part of the future of finance, where ethical values and financial prosperity converge at the Western Islamic Finance Hub.