Development of Islamic Finance in the UK

1. Development of Islamic Finance in the UK Professor Humayon Dar Chairman, President & CEO Edbiz Consulting Ltd hdar@edbizconsulting.com http://www.edbizconsulting.com

2. Introduction • The history of Islamic banking & finance in UK goes back to the 1960s and 1970s when a number of investment banks offered tailor-made Shari’a compliant solutions to their clients from the Middle East • Al Baraka Bank, however, is accredited to start offering Islamic financial services (primarily Islamic property finance) in the 1980s • But the real impetus to Islamic banking came from the understanding and favorable approach adopted by the late Lord Eddie George when he was the governor of Bank of England (1990s)

3. What led UK to become a player in Islamic finance? • Perceived demand for Islamic financial services by the local Muslim population in the UK (about 1.75 million Muslims at the start of the 1990s) • Leadership role played by the likes of Andrew Buxton (a former Chairman of Barclays Bank), Richard Thomas (currently the CEO of Gatehouse Bank), and the likes of Iqbal Khan (the then CEO of HSBC Amanah) • Other members of the Bank of England Working Party on Islamic Banking

4. What led UK to become a player in Islamic finance? • The leadership role played by the likes of Professor Simon Archer (University of Surrey), Professor Rodney Wilson (Durham University) and Professor John Presley (Loughborough University; and the only non-Muslim so far to have received the prestigious IDB Prize in Islamic Finance) • The UK produced scores of PhDs and other graduates in Islamic finance under the supervision of the above three academicians • Apart from this, the UK government took a positive view on engaging with the Muslim world (especially the Middle East) through Islamic finance

5. Historical Developments Full range of Islamic financial services: retail, investment & fund management Regulatory changes Development of Islamic financial Infrastructure Leadership role in The global Islamic Financial services Industry Middle Eastern link Got strengthened Islamic retail banking by the likes of UBK, HSBC Amanah and others Islamic fund Management Islamic indices (FTSE) Commodity Murabaha transactions on LME by the likes of Dawnay-Day Islamic mortgages By Al Baraka Bank UK Commodity Murabaha transactions Bespoke Shari’a compliant Solutions offered by the likes of Benson Kleinwort Bespoke Shari’a compliant Solutions Bespoke Shari’a compliant Solutions 1960s – 1970s 1980s 1990s 2000s

6. Regulatory Developments • 1995: Lord Eddie George (the then Governor of the Bank of England Recognition of the “growing importance of Islamic banking in the Muslims world and its emergence on the international stage” • 2003: Double Stamp Duty was abolished on Murabaha-based Islamic mortgages • 2004: First full-fledged Islamic bank in the UK – Islamic Bank of Britain started operations • 2006: First full-fledged Islamic investment bank in the UK – European Islamic Investment Bank started its operations

7. Islamic financial regulation in UK • Level playing field for Islamic banks • Non-discriminatory regime • Taxation regime looks at the substance of Islamic financial products and taxes them just like conventional products • Double Stamp Duty abolished • Murabaha transactions are subject to the same VAT related treatment as a conventional financial product (as long as such transactions are conducted by financial institutions)

8. The issue of a sovereign UK sukuk • Previous government intended to issue a pound-denominated soveriegn sukuk and regulaotry changes were brought in, after a long consultative process with different stakeholder • The current government has however changed its stance over the issuance of sukuk, given change in its fiscal policy that aims to reduce public sector borrowing

9. UK and other Islamic financial centres in the wake of financial crisis • After the financial crisis, there is only one international player that has emerged as a winner in its race for assuming the global leadership in Islamic finance - Malaysia • The likes of Bahrain, UK, UAE, Singapore, Hong Kong and others have gone quiet • Before the crisis, a lot of support institutions like law firms, consulting firms and others moved from UK to Dubai, because the real business was there • The UK Islamic financial institutions have yet to perform well to justify their existence in London • Consequently, Islamic financial activity in the UK has decreased

10. Future of Islamic banking & finance in the UK • There is no real scope for expansion of Islamic finance in the UK • The market is small and over-crowded • The demand for Islamic financial services by the UK Muslim population has not exceeded beyond the 1/4th of the relevant Muslim population • The British institutions will continue to play a significant role in the global Islamic financial services industry

11. Conclusions • The UK remains an important player in the global Islamic financial services industry • There is a lot to learn from the UK regulatory approach to Islamic banking • It is, however, advisable for any new entrants to the Islamic banking market to avoid deploying a lot of resources in the UK market • British expertise provides valuable resources for the development of Islamic banking & finance