Britain is leading the West in Islamic finance, according to a new report.
The UK is the fourth most significant centre for Islamic finance among non-Muslim-majority nations - after Singapore, Sri Lanka and South Africa. The UK could take a leading role in setting international Sharia compliant standards.
More than 20 banks across the country offer Islamic finance services – more than double the number located in the US. Five banks in the UK are fully Sharia compliant.
The report from TheCityUK, the representative body for the UK-based financial and related professional services industry, found that globally the market for services in the sector increased 7.5% year on year in 2015 to a record $2trn worldwide.
In Britain, TheCityUK estimates that assets of UK-based financial institutions offering Islamic finance services reached more than $5bn in last year.
"The Islamic finance sector is a rapidly expanding part of the global financial system. Currently, Sharia compliant assets make up just 1% of global financial assets, yet around one in four of the world population is Muslim. There is enormous potential for further growth. Given the UK's position as a world-leader in innovation and development within the sector, we're well-placed to capture this opportunity," explains Miles Celic,chief executive of TheCityUK.
The report also found that the UK has become the leading centre of Islamic finance education and training globally. It is also increasingly a centre of innovation and development for the use of financial technologies in Islamic finance products.
A number of projects across the UK, including the Shard building and the Olympic Village in London, as well as over 6,500 new homes outside the capital London, have involved Islamic finance in a significant funding role.
“Infrastructure development is a key area where greater use of Islamic finance instruments could be encouraged. Current trends suggest that this will continue to grow in the years ahead,” said Mr Celic.
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The UK was the first Western nation to issue a sovereign sukuk (Islamic bonds). Today, a total of 65 sukuk have been listed on the London Stock Exchange with a total value of $48bn.
The growth of the UK’s Islamic finance sector has been supported by the country’s government. Two years ago, Tobias Ellwood, under secretary of state at the Foreign Office, told UK press that the government aimed to make Britain the leading nation in Islamic finance.
The growth in this sector could be of sizable benefit to the country, whose economic future many are uncertain of.
"It's difficult to say that Islamic finance will be the answer to everything, although what I think we can safely say is that it had been government policy to place London alongside Dubai as an international Islamic financial capital," Jason Chuah, Professor of Commercial and Maritime Law at The City Law School, London, said earlier this year when discussing the post-Brexit economic climate in the UK.
Mercer, the investment consulting arm of US services company Marsh & McLennan, expects its wealth division to at least double its assets under management (AUM) in the Middle East as wealth in the region continues to grow despite economic headwinds, a company official said.
Mercer Wealth, which globally has $160 billion in AUM, plans to boost its AUM in the region to $2-$3bn in the next 2-3 years from the present $1bn, said Yasir AbuShaban, a Dubai-based principal with Mercer Wealth.
“Within the next two to three years, we are looking at reaching $2 to $3 billion as a conservative estimate and we do see an opportunity to do so,” said Mr AbuShaban.
Mercer does not directly make investments, but allocates clients’ money they have discretion to, to professional asset managers. They also provide advice to clients.
“We have buying power. We can negotiate on their (client’s) behalf with asset managers to provide them lower fees than they otherwise would have to get on their own,” he added.
Mercer Wealth’s clients include sovereign wealth funds, family offices, and insurance companies among others.
From its office in Dubai, Mercer also looks after Africa, India and Turkey, where they also see opportunity for growth.
Wealth creation in Middle East and Africa (MEA) grew 8.5 per cent to $8.1 trillion last year from $7.5tn in 2015, higher than last year’s global average of 6 per cent and the second-highest growth in a region after Asia-Pacific which grew 9.9 per cent, according to consultancy Boston Consulting Group (BCG). In the region, where wealth grew just 1.9 per cent in 2015 compared with 2014, a pickup in oil prices has helped in wealth generation.
BCG is forecasting MEA wealth will rise to $12tn by 2021, growing at an annual average of 8 per cent.
Drivers of wealth generation in the region will be split evenly between new wealth creation and growth of performance of existing assets, according to BCG.
Another general trend in the region is clients’ looking for a comprehensive approach to investing, according to Mr AbuShaban.
“Institutional investors or some of the families are seeing a slowdown in the available capital they have to invest and in that sense they are looking at optimizing the way they manage their portfolios and making sure they are not investing haphazardly and different parts of their investment are working together,” said Mr AbuShaban.
Some clients also have a higher appetite for risk, given the low interest-rate environment that does not provide enough yield for some institutional investors. These clients are keen to invest in illiquid assets, such as private equity and infrastructure.
“What we have seen is a desire for higher returns in what has been a low-return environment specifically in various fixed income or bonds,” he said.
“In this environment, we have seen a de facto increase in the risk that clients are taking in things like illiquid investments, private equity investments, infrastructure and private debt, those kind of investments were higher illiquidity results in incrementally higher returns.”
The Abu Dhabi Investment Authority, one of the largest sovereign wealth funds, said in its 2016 report that has gradually increased its exposure in direct private equity and private credit transactions, mainly in Asian markets and especially in China and India. The authority’s private equity department focused on structured equities owing to “their defensive characteristics.”
