The Islamic finance sector in the UK has received a major structural boost following the integration last week of the UK Islamic Finance Secretariat (UKIFS) into TheCityUK, the independent body promoting UK-wide financial and related professional services. UKIFS, which was established in March 2010, is the leading cross-sectoral body assisting with the promotion and development of Islamic Finance, both domestically and to represent the UK industry internationally.
This initiative comes at a time when Islamic finance in Europe despite the upbeat rhetoric and spate of conferences, seminars and memoranda of understanding (MoUs) has been retrenching especially in the aftermath of the global financial crisis. Only a few days ago, at the 8th Islamic Financial Services Board (IFSB) annual summit hosted by Luxembourg, Yves Mersch, governor of the Banque Centrale de Luxembourg, confirmed that the Luxembourg government will not be issuing a debut sovereign sukuk in the near future because there are currently no compelling reasons for doing so. Because the government is not in need of borrowing at the moment, any issuance of a sukuk has been deferred, albeit Mersch did not rule out a future sukuk issuance. The market has long digested a similar decision more than a year ago by the UK Treasury on the grounds that a sukuk issuance in the wholesale sterling market would not be "value for money" for the moment. With the added complication of a general election in May 2010 and a new coalition government, it was inevitable that the Conservative/Liberal Democrat government had other mere priorities in mind such as debt reduction. This coupled with a tough past two years for the UK banking sector in general, including the Islamic banking sector per se, the perception was that the latter sector had lost its steam and the UK the political will to continue its Islamic finance leadership role in Europe.
The UKIFS tie up with TheCityUK has several important implications. "Islamic Finance in the UK," explains, Richard Thomas, CEO of Gatehouse Bank and chair of the Islamic Finance Working Group at TheCityUK, "is emerging from 18 months of re-formation with a stronger combined "balance sheet", clearer business strategy and purpose, and new relationships with overseas centers and its own government. The 5 UK Islamic banks -- Islamic Bank of Britain, European Islamic Investment Bank, Bank of London & Middle East, QIB UK, and Gatehouse Bank -- are emerging from the credit crisis as much stronger individual organizations financially, with distinct business plans that complement rather than crowd the market".
The challenges ahead revolve around articulating to and convincing the UK and European market of the relevance of Islamic finance to the domestic market.
In the UK, for instance, according to Thomas, the new coalition government is changing emphasis from consumer lead debt-oriented growth, to export lead growth championed trough the SME (small-and-medium-sized enterprise) market. "In this new environment, where conventional banks are criticized for not meeting this challenge, Islamic banks are well equipped to demonstrate the viability of their model and convince the domestic market, retail and corporate, of their value added proposition," adds Thomas. Indeed, several of the UK Islamic banks confirm that their client profile constitute growing SME clients, many of them who are new to Islamic finance.
But UKIFS is not just about banking. Many believe that the UK can also play an important part in the nascent Takaful (Islamic insurance) industry; in the development of international regulatory reform from within the establishment; in defining legal and accounting frameworks from which cross border standardization of contracts can continue; in quality ETQ (education, training and qualifications) initiatives that are expected in the UK in Q4, 2011; and can also bridge the gap to the Eastern countries that are embracing Islamic financial services. "We can make the most of interest from leading centers like Malaysia to engage with the UK. A Secretariat like UKIFS can take forward these agenda points in a way that individual organizations struggle to do," maintains Thomas, whose career in Islamic banking spans some 3 decades.
Islamic bankers in the UK remain wary of aspiring rival hubs emerging in Paris and Luxembourg. The French seem to be paying lip service and seem to constrained more by the politics of Islamism across the Channel. Luxembourg on the other hand has maximized its potential in Islamic financial services in its traditional areas of strength and will be a world leading Islamic financial center for asset management and fund registration, trusts, custodial and administration services.
"Their commitment through their membership of the Islamic Financial Services Board (IFSB) and the International Islamic Liquidity Management Corporation (IILM) -- the only European Union country to accede to these organizations -- and the fact that they have seized this opportunity," warns Thomas, "is an object lesson to other western regulators including the UK".
However the fact that UKIFS in its new domain, can exist with viable working groups contributing to banking and Takaful, legal, accounting, and ETQ work streams headed by the some of the strongest names on the international stage, shows that the UK has a viable cluster that underpins its claim and ambition to be a complete center for Islamic financial services.
The UK's considerable advantage was very recently shown in the closing of the latest sukuk offering by the Islamic Development Bank.
The road show for the $750 million sukuk closed in London on May 18, 2010 when the final pricing was set and the book building exercise closed. The sukuk will be listed on the London Stock Exchange and Bursa Malaysia. It is no secret that the Luxembourg Stock Exchange was also keen to get the sukuk listed but it was London that won the day. It is important to understand the importance of TheCityUK which emerged from the Bischoff Report and is funded by the private sector and corporation of London with full engagement with the UK Government, UKTI and HM Treasury and is a politically neutral platform that covers the entire UK not just London.
Under the structure of TheCityUK, efforts will focus on safeguarding and further developing the UK's strengths in Islamic Finance, ensuring it not only remains the West's hub for this financial specialism but continues to be a significant contributor on a global stage. This latest step will see the UKIFS' working group structures and member base integrated into TheCityUK's operations with members of TheCityUK board and executive appointed to the Board of UKIFS. The Islamic Finance Working Groups in conjunction with TheCityUK executive will support the development and growth of the UKIFS within the UK and its position as a global hub for Islamic Finance.
This market development, according to TheCityUK, comes at a time of strong growth in Islamic finance across the spectrum of financial and related professional services. There are currently 22 banks in the UK, of which 5 are stand alone Shariah-compliant banks, offering Islamic finance products, exceeding that of any other Western country. There were 5 Sukuk listings at the London Stock Exchange in 2010 and one in early 2011, bringing the aggregate total at the LSE to 31 listings worth $18 billion. Islamic funds managed in the UK have combined assets of $300 million. The global Islamic finance market grew by 10 percent in 2009 to $1.04 trillion and TheCityUK estimates that the global market for Islamic finance grew at a similar rate in 2010.
Lord Green, UK minister of state for trade and investment is quietly confident that the integration of UKIFS into TheCityUK will enhance the country's and London's Islamic finance proposition globally. "As the undisputed leading Western hub for Islamic finance services, the UK has recognized the role of the (Islamic finance) sector in contributing to future economic growth. UKIFS has achieved a great deal in representing the industry since it was launched in 2010. I am pleased that it is becoming part of TheCityUK, in a move that will strengthen the promotion of the wider UK offer overseas," explained.