Brexit and Islamic finance

This post ventures some predictions about the consequences of yesterday’s referendum and today’s announcement by the British Prime Minister that the government will trigger article 50 TFEU and that the United Kingdom withdraw from the European Union. These predictions  in keeping with the purpose of this webpage and aims of IDRAK Ltd concern only Islamic banking and finance, having particular regard to UK-based financial institutions and allied professionals.

Before turning to Britain a note about Islamic finance in the EU minus Britain (‘the 27’) is in order. Aside from the funds industry which will continue unabated in Luxembourg, listings on European exchanges, and small retail banking in several countries Islamic banking and finance has had a light footprint in Continental Europe. Although some countries including France and Germany have greater relative and absolute Muslim populations as compared to Britain, neither country has sought out sharia-compliant financial services or investments to the degree that the United Kingdom has. Although the German Land of Saxony-Anhalt issued the first sovereign sukuk in the EU over a decade before that issued in the United Kingdom (in 2014) engagement with sukuk or other sharia compliant instruments has been restrained and smaller scale. The ability to passport listings or offerings of securities between the newly reduced EU and the UK is likely to diminish in the coming years, which may in small measure help erode the position of Islamic finance on both sides of the Channel. Other than that Brexit has no significant impact on the growth of Islamic banking and finance in the 27; there this industry will continue to be driven by national politics, domestic demand and developments in the global economy outside Europe, in Africa, Asia and the Middle East.

The usual caveats about uncertainty and the incremental nature of changes flowing from Brexit are in order. Having gestured at these, what are the likely consequences for the United Kingdom’s resignation from the EU, it it may be so called? A development that may materialise in the near term (in view of current discussions in the Scottish National Party, and the recent and closely contested conclusion of the Scottish Referendum), the United Kingdom will be reduced to Northern Ireland, Wales and England. The only implication of a Scottish secession on Islamic banking in the UK is that there will be a smaller market for domestic issues and more regulatory hurdles for UK Islamic banks to operate in Scotland (or vice versa). Without examining any figures the small population of Scotland suggests that the subset of Islamic banking customers who have (until Scottish succession) been able to seamlessly bank in UK financial intuitions will have little to no impact on UK banks. Whether a fully sovereign and independent Scotland will realise its present ambitions of joining the EU is an interesting matter but one with insufficient bearing on the subject of this post to warrant further examination.

Scattered statements in the ether over the last two months or so (generally from the now triumphant campaigners for Brexit) suggest that the United Kingdom post-Brexit would more greatly emphasise its ties with Commonwealth countries. If such policies and this form of promotion  were indeed adopted it would increase the importance of Islamic banking and finance since so many and so many of the larger Commonwealth countries are Muslim-majority societies, although only a few have Islamic banking sectors of anything beyond regional significance (Malaysia would be the best example); regional powers in Islamic finance include Bangladesh, Brunei, Pakistan, Maldives, and Singapore. In Africa, Mauritius and several large sub-Saharan states (Nigeria, South Africa) have engaged in Islamic finance in one form or another. Offshore jurisdictions, in the Caribbean and Indian Oceans will continue to play an enabling rule in sakk securtisation, and in fund management. The Commonwealth is only one subset of non-EU countries among the universe of countries becoming presumptively more essential to the preservation and growth of the British economy and trade generally and the considerable UK-based financial services sector, including Islamic financial services.

An important variable in regard to the retail financial services element is immigration, which became the crux of the Brexit debate preceding the referendum. After the 2 years stipulated by art 50 TFEU the UK government will succeed in reducing inflows of EU immigrants. It may passively or actively reduce the numbers of subsisting EU nationals currently resident in the country. Having reduced these numbers and having lost skills and labour the response to the resulting economic imperatives is obviously uncertain. However the most unlikely result would be a permanent reduction of migrants resident in the UK, given the insufficiency of the British national population, even accounting for British expatriates returning from the EU. Therefore new immigration flows will be sought from non-EU countries (as well as, on new terms, from EU 27 countries). The source countries of these immigrants serves as proxy for religious beliefs and religious beliefs may be taken as an imperfect proxy for demand for financial services compliant with Islamic law.

The prominent position of English law and courts in Islamic financial contracts will remain undiminished and, as indicated above, the impact of Brexit in terms of both institutional and retail financial services compliant with Islamic law is positive, even if the same may not be said for the broader short and mid-term economic outlook for Britain.


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