The time has come for Islamic finance to move into the mainstream in Europe, and the UK is leading the way, Lord Sheikh told delegates at International Finance Magazine’s EU Islamic Finance and Banking Summit that took place in London on November 18-19, 2014.
Modern Islamic finance emerged in the mid-1970s with the founding of Islamic banks, but the growth has been very rapid since the 1990s. It is forecast to grow to $2.5 trillion by the end of 2015.
Globally, the market has grown 50% faster than the traditional banking sector. Sharia compliant assets rose more than 160% between 2009 and 2011.
Savings and protection schemes launched by the sector bear many similarities to the mutual insurers and friendly savings societies that have come back into vogue since the crash of 2008 that caused so much disdain for the big High Street banks.
Delegates were also told that the ethical movement, which is growing fast in the West, is starting to work with Islamic finance to share risk and return.
And governments across Europe are showing support for the sector by levelling the playing field around tax and regulation.
The UK is the biggest centre for Islamic finance outside the Islamic world with sharia compliant assets in excess of $18 billion.
Lord Sheikh, Baron Sheikh of Cornhill, House of Lords, says: “Islamic finance presents an exciting high-growth market opportunity. It is the British government’s intention to establish and maintain Britain as the gateway to international Islamic finance. The British government would like to ensure that principles of fairness, collaboration and commitment will apply to Islamic financial arrangements and is actively encouraging sharia compliant transactions.”
The Muslim population of Europe now numbers 20 million people but Lord Sheikh believes it is time for Islamic finance to reach out to the 450 million non-Muslims of the EU too.
He says: “Islamic finance should not remain a niche, but through its appeal to everyone irrespective of religion, its market should be part of the mainstream market, increasing its potential manifold.
“Islamic financial institutions should target not only Muslims but also non-Muslims, particularly in Western countries, and their products and the pricing should be such that it appeals to a wider audience.
“To enable us to succeed in achieving our expansion for Islamic finance, we need to develop and market a range of products which will fulfil the needs of people and cater for local conditions in the relevant country where we would like to write business.”
Islamic finance is all to do with ethical forms of investment, and also investing in businesses and industries that are good for society and the environment at large. Its financial arrangements work for the benefit of society. For example, there are opportunities to invest in the generation of energy by renewable means in UK and overseas.
As such, Islamic finance should be making strides across Europe due to friendly regulatory environments, agreed Sheikh Bilal Khan, Co-Chair of Dome Advisory.
He pointed out that Luxembourg, France, Paris, Strasbourg, Brussels, Germany, The Hague and Turin were among those welcoming Islamic finance with rule changes and events.
Khan says: “It is a great time because we now have so many countries and jurisdictions that have enabled Islamic finance. The ethical movement in the West is starting to work with Islamic finance to share risk and return.”
He highlighted the UK’s first sovereign sukuk bond of £200mn, which was over-subscribed on the first morning by over £2 billion. Then bond has a maturity of five years and use the Al-Ijara structure. This is a sale-and-lease back mechanism that means investors get paid a fixed rental income on properties placed in the structure rather than conventional interest.
And in addition to the UK bond, Luxembourg issued the first sovereign sukuk in Euros. It was €200mn and was also hugely over-subscribed.
Lord Sheikh says: “The government has made it very clear of their intent to cement Britain’s position as a Western hub for Islamic finance. With the recent issuing of the sovereign sukuk, this ambition has been realised. We are the first country outside of the Islamic world to issue sukuk, a feat I believe we should be very proud of.
“The Muslim community has for some time longed for changes that would offer a level playing field between conventional and Islamic products. These recent developments have provided them with just that.”
The conference was told that the UK has the political will to ensure a level playing field for Islamic finance by Omar Sheikh, Executive Board Member, Islamic Finance Council UK.
He said that regulators need to consider that Islamic finance is a very young sector. “It operates in secular areas and in ethical areas. There should be a focus on shared values, which will allow Islamic finance to cross over into the mainstream finance markets.”
The low-carbon sector, social impact bonds, life and mutual companies are all natural partners for Islamic finance and areas where the sector could make a big contribution.
And it should be noted that the crash of 2008 had given these areas a boost, as more traditional banking had failed in the eyes of many consumers.
Omar Sheikh said: “There has been a big moral bankruptcy in our banking system. It is something many people have commented on. Islamic finance can contribute to solving this crisis of capitalism.”
Lord Sheikh said: “The problems in the financial sector made people realise the importance of Islamic finance, which is based on ethical principles and transparency.
“In context of its infancy, Islamic finance may not have all the answers today. However, it is clear that many of its values are shared amongst the other great faith traditions where a ban or strong aversion to interest is a common theme.”
Khan noted that political will is one of four cornerstones that are necessary for the furtherance of Islamic finance in the West. Institution building, human capital and regulatory progress are the other three.
However, he noted that the area was sometimes perceived as complex with its terminology that includes names like sukuk, takaful, zakat, riba and sharia.
Khan said: “Sometimes, we have complicated Islamic finance. We need to demystify it.”
The term sharia itself is problematic in the West as what is simply a system of Islamic law has become inextricably linked with extremist regimes such as the Taliban or ISIS that are known for their brutality, in the Western mind.
It is naturally hard to sell something in the retail market if the consumer links it with a group that forbids women an education. So, on the retail side, the role of education and awareness will play a key role in helping Islamic finance grow.
Islamic finance also faces other issues such as the inevitable rise in interest rates across Europe. Rock bottom interest rates, as we have seen across the continent since 2008, do something to level the playing field for Islamic banks.
However, a rise in the base rate would see them struggle to compete with savings rates being offered by mainstream competitors.
Dennis Cox, CEO of Risk Reward points out that Islamic banks did not exist in Europe pre-1982 when base rates were at 15% and above.
He says: “If you’re a depositor with an Islamic financial institution, you’re going to get a very low rate of interest. At the moment everyone is getting a low rate of interest, so it doesn’t matter but how would you feel if interest rates were at 15%?
“Many Islamic customers are also customers of traditional banks. What will they do? Will there be a herd mentality… causing a strain on liquidity? The honest answer is we just don’t know.”
Another point is that Islamic financial institutions must work in conjunction with a sharia board in order to ensure they conform to Islamic law. This is obviously an extra set of rules and regulations and an extra cost that must be borne and eventually passed on to customers.
Cox says: “We have a higher requirement on ethics and a higher requirement on making sure we are sharia compliant. When a firm says what they have done is not sharia compliant, that is a horrible own goal and that really hits reputational risk. Reputational risk is even more important to an Islamic bank.”