As the referendum on whether to leave or remain in the European Union (EU) looms in the UK, voices are getting louder, particularly in the country’s financial industry that it would not necessarily be a good idea to vote for a Brexit. Since the weight of the UK in the global financial market is substantial – the financial sector of the City of London has a 20% share in the global market for trading foreign securities and a sizeable part of it depends on the UK’s access to the internal EU market – such a strong position would be certainly threatened.
This could have serious impact on the growing role of Islamic finance in Europe which is entrenched in the UK and from there makes its way into the continent. Since the 1990s, when the first mortgages in the UK were set up in line with Shariah law, the country has aggregated the most advanced experience in Shariah-compliant finance in the Western world. Corporate sukuk followed a decade later, and in 2014, the UK became the first country in the EU to issue some sovereign sukuk and listed them on the London stock exchange. From then on, Islamic finance steadily entered the rest of Europe.
This, in turn, has continuously attracted new business from Arab countries with Middle Eastern corporations and wealthy Muslims seeking a way to enter the EU market through the UK by using the latter’s growing variety of Islamic financial services. And with the increasing share of better-off Muslims in communities throughout the EU, demand for Islamic finance in the European market as a whole is expected to increase further and, with it, the importance of easy access to those clients as well.
Currently, authorised financial services firms in the UK, including Islamic finance providers, have the right to carry out business in any other EU (and EFTA, or, European Free Trade Association) state, with or without a branch, provided the requirements of the single market regulations are met. This allows UK-based banks, investment firms, asset managers, insurers, insurance intermediaries, payment services providers and e-money firms free access to EU markets.
“Depending on the form any Brexit might take, leaving the EU could mean either restricted EU market access for UK-regulated banks and financial services businesses, with ‘third country’ status following an exit, or continued access to EU markets but without the ability to vote on financial services legislation,” notes Karen Anderson, Partner at London-based law firm Herbert Smith Freehills and expert on financial services regulation.
A Brexit could also mean a blow for the UK’s ambitious plans to establish London as a global hub for Islamic finance to stand alongside Dubai and Kuala Lumpur, as suggested by UK Finance Minister George Osborne last year. There are currently six fully-fledged Islamic banks in the UK, and a total of 20 lenders offer Islamic financial products and services, more than any other Western country.
Middle Eastern banks have a particularly big exposure to the UK Islamic finance industry through their subsidiaries there, namely Qatar Islamic Bank, Abu Dhabi Islamic Bank, Mashreq (UAE) and ABC International Bank (Bahrain). The Bank of London and The Middle East, the largest Islamic bank by balance sheet, profit and breadth of service in the West, sees itself as a “bridge” between Europe and the entire Mena (Middle East and North Africa) region and could be faced with a number of disadvantages after a Brexit.
Adding to that, a large number of law firms and accountants are involved in the Islamic finance industry in the UK, and, over the past years, universities, business schools and centres of excellence have broadened their offerings in Islamic finance education. The London Stock Exchange developed a growing reliance on Islamic finance, and to date more than $34bn in sukuk has been raised through 49 issues at the exchange.
Furthermore, given the number of people employed in the Islamic finance sector in the UK, a Brexit could also lead to a noticeable brain drain towards mainland Europe. Consultancy PwC says that in case of a “Leave” vote, a total of as many as 100,000 financial services jobs, including in Islamic finance, could be lost and being shifted to EU financial institutions of which many are in search for Islamic finance talent.
Overall, a Brexit seems to be able to bring a lot of adverse effects on the Islamic finance business in the UK.