Amid economic uncertainty, Islamic finance is gaining traction in the UK

With the COVID-19 pandemic likely to profoundly affect the global economy in many ways, the demand for Islamic finance products looks set to continue to rise, as more and more investors demand more transparency and more ethical decisions from their financial institutions.

One of the more interesting developments in the UK’s financial sector over the past decade is the increasing prominence of Islamic finance as an option for both Muslims and non-Muslims. Islamic finance is a relatively new phenomenon, only emerging in the 1970s when banks in the Middle East and Asia starting offering Sharia-compliant financial services to their customers. In recent years, the sector has grown exponentially, particularly since the 2008 economic crash.

In some ways, that’s not surprising: the reckless risk-taking of some Western financial companies – exposed so harshly during the crash – led investors to look at alternative methods of investment. And at the heart of the Islamic finance model lies core tenets that ethical investors can support: interest on loans is forbidden, and the risk and reward of investments is shared between investor and institution, meaning there is far more clarity about the type of investments being made.

These tenets have proved attractive to investors in the UK, and assets of UK-based institutions that offer Islamic finance options currently total more than $5 billion. This figure is set to increase in the coming years, with a Thomson Reuters report estimating that the average growth of Islamic business assets will top seven percent annually until 2023.

One of the key players in the UK’s Islamic finance sector is Al Rayan Bank, formed in 2004 to service the growing demand for Sharia-compliant investors. According to Maisam Fazal, the bank’s Chief Commercial Officer, there are a variety of reasons for Islamic finance’s rise in popularity.

“We’ve found people are more aware of their responsibility to lead ethically conscious lifestyles than ever before,” he says. “Our research shows that 37 percent of all British adults believe that choosing an ethical financial service provider is as important as issues such as recycling.

“What sets Islamic banks apart is that, due to being Sharia compliant, these ethical values are actually integral to how we operate, and what products we offer, so we expect to see interest in Islamic banks grow further in the coming months and years. We’re also seeing increasing interest from investors abroad – with ‘green’ property finance also growing in awareness and popularity.”

Those sentiments are echoed by Dr. Amin Mohseni, an Associate Professor of Islamic Finance and Economy at Hamad Bin Khalifa University, a member of Qatar Foundation. “Islamic finance gained a lot of interest outside the Muslim world after the 2007-2009 financial crisis, when Islamic finance institutions – due to their stronger link to the real economy – were able to weather the crises more successfully,” he says.

One misconception about potential investors is that Islamic financial products are not regulated as stringently as other financial services.

“Islamic banks in the UK are regulated in the same way as other UK banks. All eligible deposits with Al Rayan Bank are protected by the Financial Services Compensation Scheme too, meaning customers are entitled up to £85,000 in compensation if the bank comes into financial difficulty – just as any other UK bank,” Fazal says.

“Another misunderstanding is often around the risk, which is shared between bank and customer in Islamic finance transactions. Like other Islamic banks, Al Rayan Bank offers an expected profit rate (EPR) rather than interest on our products.  However, in the 16 years that Al Rayan Bank has been in operation we have always paid the EPR quoted to customers, and on many occasions we have paid more.”

Islamic finance is also a viable option for non-Muslims, something that, according to Dr. Mohseni, is not always fully understood. “For Muslims it is a religious requirement that must be abided by, while for non-Muslims it will be an alternative mode of finance that is more ethical, inclusive, stable, and environment friendly,” he says.

Those traits are becoming increasingly important in the West, he adds, particularly among younger generations. “Ethical, and environmentally and community-friendly banking services are becoming increasingly important for millennials, and I would like to see more promotion of these universal ideals when it comes to promoting Islamic banking among non-Muslim communities.”

A major milestone in the UK’s Islamic finance industry was the 2018 Islamic Bond, or sukuk, issued by Al Rayan Bank – the first Islamic bond to be issued in a non-Islamic country. A sukuk operates in a similar way to a traditional bond, but investors know their money won’t be invested in activities that are not Sharia compliant, such as in gambling or alcohol companies.

“The bond was hugely oversubscribed, with final demand at 155 percent, reflecting the strong demand for Islamic financing instruments that exists in the market, and the fact that the UK is well positioned to become the destination of Sukuk issuance for Western Europe,” Fazal says.

“The sukuk also demonstrates the progress made in the sector in terms of awareness and understanding. There’s still a way to go but this is just one example of how public and private sectors can demonstrate the opportunities that the Islamic finance sector presents.”

In Qatar, Islamic finance has become more than just the prohibition of charged interest, and has become a holistic way of finance. “Qatar is on the road to introducing genuine Islamic finance into the fabric of its society as well as its financial institutions,” says Dr. Mohseni.

“When I say ‘genuine’, I mean paying attention to every dimension of an Islamic financial system, one which goes far beyond the prohibition of Riba [interest-bearing loans] and excessive speculation, and focuses on other ethical areas such as environmental sustainability and waste reduction. Many of the Sustainable Development Goals are part of Qatar’s national vision, and Qatar is taking important steps towards promoting these goals in various aspects of its society and at a global level.”