Uncertainty over the UK’s future status as a financial hub after the country will have left the European Union (EU) probably by 2019 is already casting a shadow over London’s agile Islamic finance sector.
Generally, it is estimated that London would lose at least 10,000 banking jobs and 20,000 roles in financial services as clients move €1.8tn of assets out of the UK in the wake of a looming Brexit. This has substantial implications for the UK as finance and related professional services account for 12% of the British economy at a value of £190bn a year.
The banking exodus would highly likely also hit the Islamic finance sector in London, which is the largest globally in a non-Muslim jurisdiction. London currently hosts more than 15 large banks that operate Islamic finance windows, including Standard Chartered, HSBC, Barclays Capital and Royal Bank of Scotland, as well as fully Shariah-compliant banks such as Qatar Islamic Bank, Islamic Bank of Britain, Bank of London and the Middle East and the European Islamic Investment Bank.
Adding to this, dozens of related service providers, namely more than 20 law firms, are operating in the sector, as well as a sizeable number of Islamic finance education institutions and universities offering degree programmes in Islamic finance, which ranks London among the global leaders in Islamic finance education.
Islamic finance has also been used in a number of sizeable real estate developments across the UK, including the Shard tower, owned by Qatar, the Olympic Village in London, the redevelopment of the Chelsea Barracks and the Battersea Power Station, while Islamic finance is also used for individual home finance, for infrastructure funding and student finance.
The UK in 2014 also became the first non-Muslim nation to issue a sovereign sukuk and today has a total of 65 sukuk listed on the London Stock Exchange at a value of almost £38bn.
In all, assets of UK-based Islamic finance entities currently stand at around £14bn, according to government figures.
However, the sector’s stability and strength could be threatened by Brexit mainly by the uncertainty of the UK’s economic future, and much will depend on what kind of deal will be eventually agreed on with the EU. But many banks and financial services firms have simply not so much time to wait for the outcome as they need to do their forward-planning, particularly with regards to a potential loss of bank passporting rights with the EU and the ability to freely invest in the bloc. The declining pound sterling is also putting pressure on company assets, namely for banks focusing on trade finance and other cross-border operations.
A banking lobbying group in London has already urged the UK government to introduce post-Brexit laws and regulations that make sure that demand for Islamic finance services does not diminish, which equals a call for Islamic investment promotions after Brexit, particularly for corporate sukuk.
So far, there is a commitment that the UK will return to the sovereign sukuk market in 2019 with a £200mn issuance, according to Economic Secretary to the Treasury, Stephen Barclay, who at a finance conference London on September 11 reaffirmed the UK’s commitment to the industry.
Barclay also said that he believes Brexit will not have an impact on the UK’s Islamic finance industry to the extent it will expectedly have on the conventional finance sector because of some favourable underlying fundamentals. There is the familiarity with English law and the reputation of English courts that appeal to Muslim investors, and a continuance of an Islamic finance institution in the UK is also likely to be dependent on the extent of investments in the UK and to which extent it sees the UK as investment destination in its own right – namely for real estate and corporate investments – rather than a route into or a springboard to the EU.
But still, the possibility of a Brexit-triggered decline in economic growth in the UK poses a major risk for any investor, including Muslims, as it reduces both the opportunities and the attractiveness of the UK as an investment destination. Another issue is uncertainty over future taxation and possible regulatory restrictions. While Prime Minister Theresa May has suggested transforming the UK in to something resembling an offshore finance haven, this is far from being a done deal and nothing investors would responsibly reckon with.
As long as the UK gives no clear direction whether and how it would excel as a financial hub in the future ahead of its competitors, the latter will not stop positioning themselves as alternative locations. Within the EU, Luxembourg and Dublin, and partly Frankfurt, have good chances to take on roles as Islamic finance hubs for Islamic finance institutions with business in the EU, while destinations in the GCC with their financial free trade zones, absence of taxation, potential for incentives and initiatives for sector innovation, namely Doha, Dubai, Abu Dhabi and Manama, would certainly attract those with a global focus in order to leave the Brexit suspense behind.
A delegate uses a laptop computer during the 9th World Islamic Economic Forum in London (file). The Brexit-driven banking exodus would highly likely also hit the Islamic finance sector in London, which is the largest globally in a non-Muslim jurisdiction.