The UK is making efforts to create a favourable legal environment for Islamic finance, and other European countries are likely to follow. Melodie Michel reports.


For the first time this October, the World Islamic Economic Forum (WIEF) will be held London – in the non-Islamic world. This is a turning point in the Islamic finance industry, and reflects the sector’s growing popularity outside of its traditional markets. Islamic finance assets have been increasing consistently for years now, reaching US$1.3tn in 2011. But until recently, this type of financing was only implemented in Muslim countries in the Middle East and Asia.

UK push

Islamic finance is expanding in the west, and the UK is taking the lead. In March 2013, the British government launched an Islamic finance task force in charge of promoting shariah-compliant financing in the country, after having changed banking laws in order to accommodate Islamic finance transactions.

According to Richard de Belder, a partner at Dentons and a member of the UK government’s Islamic finance task force, the UK’s relationship with shariah-compliant financing dates back to the years when Eddie George was governor of the Bank of England (1993 to 2003). He first got interested in it when his neighbours, a Muslim family, explained to him that it was difficult for them to obtain a shariah-compliant mortgage due to the incurred interest. He then encouraged the promotion of Islamic finance in the UK and successive governments have followed the same path, changing various tax laws and regulatory provisions to level the playing field.

“London in particular has always been willing and able to accommodate different types of financing. As Islamic finance is international in its scope, the government and the City of London thought that from an economic as well as social perspective it was a good thing for London to broaden its area of expertise to try and develop it. At the same time, it created a product that met the aspirations of a large number of people living in the UK,” de Belder tells GTR.

Now that the UK has made it clear it wants to allow more Islamic financing within its borders, the task force needs to level the playing field in the SME sector. Jervis Rhodes, head of corporate banking at Bank of London and the Middle East (BLME) says: “Specifically, the Bank of England could do more to open up the Funding for Lending Scheme (FLS) to the UK’s Islamic finance sector, which has emerged as a valuable source of capital for the mid market and the SME market. If this is done, the significant contribution in financing that banks like BLME have been providing to the UK mid market could be increased still further.”

There are many reasons why UK companies would want to raise Islamic financing, not only for their Middle East trade. Rhodes explains: “First, trade customers are looking for banks that provide trade finance facilities and Islamic banks have the liquidity
to offer these facilities. Second, Islamic banks have a long tradition of international and domestic trade finance; it is probably the most established product line amongst Islamic banks.”

Safety and liquidity

The liquidity aspect cannot be overlooked: Islamic banks proved much more resilient than others during the crisis, and today the Muslim world has more liquidity than it can use, a fact that companies in the west are very much aware of. The example of Trafigura, which signed a revolving credit facility largely dominated by Islamic banks at the end of 2012, speaks volumes.

The UK’s push to become an Islamic finance hub in the West is closely linked to the country’s desire to attract Middle Eastern liquidity for its infrastructure projects. “The thinking is that Middle Eastern investors in particular like having an Islamic finance alternative available, and so having a shariah-compliant fund or tranche for an infrastructure project would help to attract money,” says de Belder.

But according to Hani Salem Sonbol, deputy CEO at the International Islamic Trade Finance Corporation (ITFC), liquidity is not the main reason for the recent surge in interest from the west. He tells GTR: “In the west they have practised Islamic banking and found it to be very usable.

As it spreads all over the world, it is becoming very obvious to many in the world that Islamic banking is a good system. Since 2009 it has been proven that any speculations or deregulations will lead to a crisis, and you don’t see that in Islamic finance. So the first reason why international banks do Islamic finance is the confidence in the system, the security that is really what they are looking for after the crisis.” He adds that Islamic finance is particularly relevant in trade, with new solutions constantly being developed to meet demand. “When we started doing trade finance 35 years ago, no other multilateral development bank was really doing this.

We started with murabaha, then developed more tools, focusing mainly on structured trade finance and supply chain. We now have a specialised department for structured trade finance, and we think it is going to be the tool that we will be depending on for some time.”

Because of these reasons, other countries are following the UK’s example. With the biggest Muslim population in Western Europe, France has made changes to its tax system to allow for Islamic finance transactions. For cultural reasons, the move was contested in the political sphere, but experts suggest that if France adopted the UK’s open approach, Paris could overtake London as Islamic finance’s European hub by 2020.

Ireland and Luxembourg are also adapting to cater for shariah-compliant financing, having allowed the issuance of Islamic bonds, or sukuk in the late 2000s. Outside of Europe the fastest-growing area is Africa, where Islamic banks are very active in financing projects, and where a lot of countries are looking into pushing the Islamic finance sector – mainly Nigeria, Uganda and Kenya.

Tax regimes

Opening their doors to Islamic finance poses various challenges to western countries, including the need to get familiar with the system. “The documentation will contain a small number of terms that a conventional customer may be unfamiliar with. However, this has not put off our customers,” says BLME’s Rhodes.

But the main issue comes from tax regimes, which in many countries are not adapted to interest-free banking. Dentons’ de Belder explains: “In most countries the laws and regulations are geared up for conventional banking, with reference to interest and so forth, so it’s very difficult for a shariah-compliant bank to operate in that environment, unless the government changes these laws. That’s what the UK has done. If a non-Muslim majority country is looking to promote Islamic finance, the government must get involved.”

Once the government takes the right steps to level the playing field though, there is no limit to the use of Islamic finance in western countries, and in the future we could even see it in trade transactions not involving Islamic countries. BLME for example has a majority of non-Islamic customers, who trade almost anywhere in the world. The bank’s clients include UK-based metal shipping firm Ocean Partners, with which BLME has a US$40mn commodity finance line.

According to de Belder, it will all come down to pricing: “It’s possible that non-Islamic countries will trade between each other using Islamic finance tools in the future, depending on regulations. From a commercial perspective, it all depends on price at the end of the day. If the counterparties understand the process and the price is right, then they will be interested in looking at Islamic finance as an alternative.”

In its effort to meet the needs of its member countries, the ITFC has been led to promote Islamic finance outside of its usual markets. Sonbol points out: “Trade is a global business and Islamic countries can’t just trade between each other. You have to go cross-border and face competition in pricing. Islamic finance is a system, not a religion, though the basic principles for it are drawn from our Islamic teaching. We now do business in China, the US, the UK, and have no restriction there as long as they comply with the shariah principles.”


What could present an obstacle in the expansion of Islamic finance is a certain lack of standardisation on a global scale. Despite its ancient roots, Islamic finance is still a relatively young industry, and at the moment there is no centralised regulator, which some worry might result in slipping standards.

According to the ITFC’s Sonbol, more efforts have been made to regulate the industry, but education is needed to ensure its longevity.

“There are dedicated commissions created by governments, ministries of finance and central banks that are working very hard to help the industry be better understood. In the meantime we are also auditing our accounts and have Islamic banking arbitration agencies in Dubai.
“There are legislations but those looking to implement more Islamic banking have to make sure the system is really there to protect Islamic banking. They are now trying to find more Islamic banking practitioners to look after the sector in the future. There is also the shariah committee, made up of scholars that ensure transactions are compliant with the shariah, but unfortunately this is a highly specialised area, and there are not many people in the world who can do this job. This is why we are trying to focus on the next generation,” he says.

Existing regulatory bodies include the Bahrain-based Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI), created in 1991 to issue international standards on accounting, auditing and corporate governance; the Malaysia-based Islamic Financial Services Board (IFSB), which issues global standards and guiding principles for the industry’s banking, capital markets and insurance sectors; and the International Islamic Liquidity Management Corporation (IILM) established in 2010 to create and issue short-term shariah-compliant financial instruments to facilitate cross-border Islamic liquidity management. But all these institutions only issue guidelines, none of them mandatory.

Whoever takes on the task of implementing global standards for the industry will also have to tackle the cultural differences within shariah principles themselves, as rules vary between ‘liberal’ Islamic countries such as the UAE and more conservative ones, like Saudi Arabia.

However, some argue that this flexibility is contributing to the development of Islamic finance across the world, as it contrasts with the over-regulated conventional finance.

Dentons’ de Belder argues: “In my view, modern Islamic finance really took off in the late-1990s, so in that context, coming up with standardised documents is still a work in progress. It could be helpful in certain areas if there was standardisation, but the counter-argument is that as a newly developing area, having flexibility without standardisation is actually an encouragement to creativity. In the end Islamic finance is still growing, with or without standardisation.”