The Rise Of Islamic Finance

Back in 2013, UK Chancellor George Osborne penned a thought piece in the FT arguing that London could – and should – lead the world as an Islamic Finance hub.

The reasons for this ambition were obvious, and remain so to this day. Islamic Finance is huge, and growing fast, with the global Muslim population expected to explode from less than two billion in 2015 to almost three billion by 2060.

Why now?

Islamic Finance assets were estimated to be worth $2 trillion in 2015 and this figure is projected to grow to $3.5 trillion by 2021. At present, many Muslims investor, both retail and institutional, are forced to invest in conventional financial products because they lack Shariah-compliant alternatives. As the volume of compliant products increases, capital inflows increase, too.

This isn’t just about population growth. Islamic Finance is based on ethical and socially responsible standards, ensuring fair distribution between all parties, making it an attractive option for investors in the aftermath of the global financial crisis. Furthermore, new Islamic Banking rules mean that new assets, including gold, are eligible for investment for the first time.

London’s enviable track record in Islamic Finance

Since 2013, political administrations have come and gone, but the City Of London remains ascendant. Other financial centres have also been flexing their muscles in Islamic Finance. Malaysia, Indonesia and the UAE are the main hubs, but London remains well positioned.

London’s track record in Islamic Finance actually harks back to 1982, when the first Islamic bank was launched in the UK. Later, in the early 2000s, the British Government removed tax barriers for Sharia-compliant products and the FSA approved the first Islamic British bank.

Fast forward a decade to 2014, and Britain became the first country outside the Islamic world to tap the bond market with a sovereign sukuk, in a landmark transaction. This move not only diversified the UK’s following by attracting investors from the Middle East and Asia – it also sent a signal to the world that the UK was taking Islamic Finance very seriously.

Since then, growth has been gradual, but meaningful. Today, Britain has more Islamic financial institutions than any other Western country, with more than 20 international banks – five of which are fully Sharia-compliant – and more than 20 law firms offering legal services to Islamic Finance. This represents the development of a cohesive infrastructure.

This should come as no surprise. In addition to banks offering Sharia-compliant products, London has a well developed capital markets ecosystem composed of dealers, issuers, investors, lawyers, accountants and insurers, not to mention some of the world’s most progressive regulators. Furthermore, the LSE is an important venue for sukuk issuance, with over $48bn raised through 65 issuances. As recently pointed out by Standard Chartered, Sukuk is no longer a niche – it’s a category within fixed-income. Recognising this, Origin now supports the sukuk format, and we hope to be announcing our first islamic financial borrower soon.

Enter fintech

What role does finetch have to play in driving the growth of Islamic Finance? Well, for one thing, it presents a huge opportunity to the UK to consolidate its position as a key centre.

Fintech has been perhaps slow to cater to the needs of Muslims, but that is changing, with a host of innovative startups leading the charge. Indeed, a recent report by Ernst & Young noted that fintech has the potential to attract 150 million customers to the Islamic banking sector over the next 5 years. A host of innovative startups are driving the next chapter in areas such a crowdfunding and P2P lending:

– Singapore-based Kapital Boost are addressing the shortage of attractive Islamic-based investments in Southeast Asia.
– Beehive, the first P2P lending platform to be regulated in MENA, is already getting good traction.
– US based crowdfunding platform LaunchGood is the the so-called “Kickstarter of Islamic crowdfunding”.

Until now, there has been a dearth of Islamic Finance startups in the UK and there remains only a handful of Shariah-certified fintechs operating here. This is a somewhat glaring omission when you consider that Islam is the second largest religion in the UK, with a population of 2.8 million people. London based Yielders are bucking the trend. They specialise in crowdfunded property investments. Another name is QardHasan, recently launched by EDAID under the banner of the UK’s first Shariah-compliant crowdfunding platform. These startups are really important as they are represent the future of Islamic Finance in the UK, one that’s powered by technology and accessible to all.

Ultimately, this isn’t a competition. A rising tide lifts all boats, and collaboration between different financial centres means that we can all win together. I was in Dubai last week meeting issuers and dealers, and there is a palpable sense of excitement there about the future of Islamic finance. I firmly believe that fintech has a vital role to play in that future, and here at Origin we will be monitoring the sector closely and doing everything we can to support it.