Islamic Banking and Finance in the United Kingdom — The Recipe for Success


The Islamic finance sector in the United Kingdom has seen enormous growth both domestically and internationally. London is one of the top five financial centers in the world for Islamic finance and is the premier center outside the Muslim world. What are the key factors that have lead to this success?
An essential ingredient is a regulatory framework that can accommodate Islamic finance principles and a regulator that is prepared to work with Islamic institutions to overcome technical hurdles. The Bank of England has had a close interest in the Islamic banking sector since the early 1990s. The Financial Services Authority, created in 1998, articulated the policy of “no obstacles, no special favors,” its approach being one of establishing a level playing field within the overall framework of its risk-based approach to regulation.

There must be a tax regime that enables Islamic financing structures and products to be treated in an equivalent manner to their conventional counterparts. The U.K. tax authorities’ aim has been to ensure that Shariah-compliant financial products are taxed in a way that is neither more nor less advantageous than equivalent banking products in the conventional sector. A package of measures has evolved and been introduced over a period of six years which, in broad terms, works by setting out particular fact patterns that describe generically equivalent Islamic financing structures and products, but without naming them, and applying specific tax treatment to putting them on a level playing field with the nearest equivalent conventional financing structure. The specific tax treatment is not restricted to Muslim customers or Shariah-compliant products. Indeed, the legislation is silent on this, as to avoid discrimination issues.

A legal system that is recognizable on an international basis for cross-border transactions and that is widely enforceable is essential to the mix. English law has long been accepted in the international finance markets and has lent itself well to Islamic financial transactions.

The courts must adopt a pragmatic approach to Islamic products. The U.K. courts have taken the approach (based on specific facts) that a general reference to the principles of the Shariah of the type often seen in documentation should be regarded as being merely a reference to the parties’ desire to state the principle of compliance with the Shariah. The market has generally embraced this sentiment.

Another essential element is the existence of a body of legal, accounting and banking professionals who are well-versed in cross-border financing transactions and are prepared to invest time in developing the knowledge and skill sets to put deals together and implement them. As one of the world’s largest financial centers, London can easily fulfill this need.

Conventional banks must also be willing to participate by opening Islamic “windows” within their organizations. We have seen a large number of U.K. banks and foreign banks in the U.K. adopt this approach to very great effect.

Trade organizations with links to the Muslim world that are active in promoting the interests of their members are helpful in stimulating the debate and helping to pull together the interested parties.

Finally, there must be a clear willingness of the government to promote Islamic finance. In the U.K., we have been fortunate that the government has fully supported the industry. Only about 3 percent of the U.K. population is Muslim, but it is the second largest religious group in the U.K., and the government has listened to the needs and concerns of the Muslim population and reacted by implementing the necessary changes. It has also enabled and encouraged the banking industry to harness the U.K.’s legal, accounting and banking expertise to develop the industry to its pre-eminent position today.

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