How Islamic financing can boost Britain’s economical recovery from Covid

Islamic finance has an important role to play in supporting Britain’s recovery from Covid-19, in line with the Lender of England, as the lender becomes the first Western central bank to release a Sharia-compliant, non-interest structured deposit facility.

Andrew Hauser, executive director of market segments at BoE, stated the facility, where deposits from Islamic banks will be backed by a return-generating fund of Sharia-compliant assets, will strengthen the UK’s function as the leading financial center for Islamic finance beyond your Muslim world, particularly since it emerges from the pandemic.

“The core principles of Islamic finance are strikingly well-suited to giving an answer to some of the most important challenges we will all face in rebuilding our economy once Covid has passed,” Mr Hauser told delegates at the digital UK Islamic Finance Week.

These include “prioritising equity-like risk-posting over debt”, he said, in addition to “factoring ethical and environmental considerations into investment decisions and embracing ground breaking personal solutions beyond traditional banking”.

The global Islamic finance services industry grew 11 % in 2019, in comparison with a year earlier, with assets of $2.4 trillion so that it is 1 / 3 bigger than it was in 2015.

Three-quarters of these Islamic finance resources are held by banking institutions, with the sector also comprising a good nascent Islamic insurance sector (takaful) and a good much bigger capital market. That is anchored by the growing stock of sukuk released by corporations and governments, and a lot more than 1,500 Sharia-compliant expenditure funds.

The UK now has four exclusively Islamic banking institutions with assets of more than £5bn, and greater than a dozen conventional banking institutions offering Sharia-compliant services, alongside a growing band of investment organizations and advisory companies.

The human and financial cost of Covid-19 has hit the Muslim world very difficult, said Mr Hauser, which explains why some might worry that the pandemic will "slow the pace of growth in Islamic finance, as financial activity declines”.

Market participants may then revert to more conventional tools, to meet the daunting necessities of the crisis, he said.

Scott Levy, chief executive of London-based Bedford Row Capital (BRC), which specialises in issuing sharia-compliant credit debt for small-to-medium-enterprises, said the UK’s mid-market sukuk sector is severely undersupplied, but has huge growth potential as there aren't currently enough products to meet up demand from international and Middle East investors.

“The UK environment increase through better education and supporting companies in the UK to actually go out to market and speak about it,” he told The National.

"There can be an Islamic finance facet of the town in the UK which discusses London being truly a hub for Islamic finance. But unless persons like us do something, it will not happen.”

BRC was create in 2015 to attempt to plug the financing gap for SMEs seeing as banks became increasingly reluctant to lend.

Sukuk relationship issuance now is the reason 70 % of the firm’s business, with the company looking to bill between $500m and $1bn in sukuk issuance up coming year, with at least 50 % of the funds produced up of inward investment into the UK, mainly from the center East. A lot of that financing will head out towards the source chain for the food industry, Mr Levy said, to make certain that food security isn't compromised through the pandemic.

“Because of Covid, [conventional] banks are actually being even more conservative in what they invest in. And the not as much the banking institutions do, the more prospects there are for all of us," he said.

"Nobody knows the near future, so the persons that would traditionally look at medium-term investing nowadays won't, so people are sitting on money, desperate to look for something to do with their money. Which means this is usually why we are looking at food security.”

In September, the company unveiled multi-currency denominated Sharia-compliant and typical short-dated Insured Money Market Certificates (IMMC), which aims to raise €250m ($301.2m) by targeting the agricultural sector and supplying a positive return to investors.

“With so very much uncertainty and costs at record lows or in negative territory, investors happen to be hungry for secure benchmark-beating returns,” Mr Levy said.

Professor of banking and financing at the Business University Thorsten Beck said London gets the potential to take the business lead on sukuk debts issuance as a result of its historical marriage with Islamic financing and the infrastructure it all has in place to support product production and new types of funding.

This position could possibly be compromised, he said, when the UK finally ends the Brexit transition period on December 31.

“If you asked whether London could also turn into a European Centre for Sharia-compliant finance, I possess to be a little extra sceptical because we must see what will happen with Brexit. There happen to be other competitors including the Netherlands, for instance, that as well want to tap the forex market," Mr Beck informed The National.

Mr Hauser said the UK's historical relationship with the sector, from the commodity-based short-term liquidity operations and trade finance of the 1970s to the first UK Islamic bank, investment funds and takaful in 1980s, make it the pre-eminent centre for Islamic finance.

"That reflects the significant, well-established domestic Muslim populace; its strong romantic relationships with the wider Muslim environment; and its own deep expertise in economical industry origination and distribution, embedded in an adult legal and regulatory framework,” he said.

Key aspects of Islamic finance also help to make it particularly well-suited to financing the post-Covid-19 recovery.

“First, the philosophical concentrate on equity-like sharing of risk and prize can be increasingly relevant as marketplace participants reach grips with the scale of debt accumulated in response to Covid,” he said.

When interest levels are low, the attractions of conventional personal debt are clear, Mr Hauser explained, particularly for all those able to secure fixed-term rates in regional currencies. Those borrowing at floating costs, short maturities or in foreign currency, however, face “sharp negative income shocks” when rates rise, personal debt rolls over or native currencies depreciate.

“Risk-posting contracts, incorporating those promoted by Islamic finance, pose materially lower medium-term risks to stability,” he said.

“THE LENDER of England has very long advocated the risk-sharing merits of GDP-linked instruments, which could be packaged in sukuk form.”

The lender has teamed up with the finance ministry and the UK Financial Conduct Authority to create a high-level working group to consider methods to foster a longer-term financial market segments culture to support productive investment.

Other benefits of Islamic finance, said Mr Hauser, include the truth it avoids buying socially harmful activities, something that provides a good amount of scope for additional growth.

“Issuance of so-called ‘green sukuk’ offers risen sharply during the past 3 years - and the Islamic Production Bank issued an impressive $1.5bn sustainability sukuk in June. But they are nonetheless quite modest numbers in accordance with the vast sums of money nowadays looking to invest in credible environmental, public and governance assets,” he said.

Islamic banks often face challenges on efficiently managing their liquidity, as the ban about the payment or receipt of interest prevents them from accessing the various tools to do so.

Mr Hauser said the BoE’s new Choice Liquidity Facility (ALF) might “help level the using field" as it allows Islamic banking institutions to carry a reserves-like asset found in a non-curiosity based environment.

Set for release in the next few months, the ALF might be structured as a good wakalah or fund-based model often used by the sector.

“The strengths of the model include its relative simplicity - conceptually and practically - and its own flexibility to accommodate future changes in exactly what is a still fast-developing industry,” Mr Hauser said.

The ALF will grow as the UK Islamic bank sector grows. And it'll be well-located to exploit the growing diversification of obtainable HQLA-eligible sukuk assets.”