Art 50 Activation and Islamic Finance

Brexit is of potentially global geo-political and strategic import. Its repercussions will also be felt by IFIs and IFB practitioners both inside and outside of the United Kingdom and the European Union.

As a preliminary general observation about the status of EU law in the UK, the “Great Repeal Bill” is currently being debated in Parliament; contrary to the meaning suggested by the bill’s current name, it actually is concerned with the incorporation of existing EU law into UK law, rather than with the repeal of legislation; the starting express assumption of this Bill is that such incorporation will occur “wherever practical.”[2] The conditions under which incorporation would or would not be practical are not further specified by government guidance at this early stage of this wide-reaching exercise. The UK will continue to be bound by EU law up to the date of the Great Repeal Bill, but will not be bound by future EU law except as agreed under the art 50 negotiations. Any changes to the legal and regulatory framework to which IFB is subject in the UK will not (subject to the arrangements made by Britain and the EU) be a result of EU action but rather action of the British Parliament and the ministries and regulatory authorities subordinated to it.

In relation to IFIs whose operations are mainly domestic, the impact of Brexit is unlikely to be any greater or deleterious than it will be on other enterprises and sectors that do not purport compliance with Islamic law; in fact as will be suggested below there may be compensating benefits to the IFB sector unavailable to other sectors of British banking and the broader economy. The most relevant comparator in terms of risk and competitiveness is other small to medium sized deposit-taking institutions: banks, cooperatives and building societies and the regulatory terrain upon which they travel; the FCA, PRA, HMRC and other concerned authorities are unlikely to begin to single out Islamic financial services or IFIs or to subject them to onerous requirements to which conventional financial institutions are not subject. Furthermore it is reasonable to predict that, to the extent any significant changes are made by the material authorities, IFIs and IFB are likely to become more rather than less important and valued on policy grounds once Britain has left the EU; at all events the posture of the government in relation to IFB, which has been on the whole favourable (certainly as compared with the posture of any other EU member state) is very unlikely to become less affirming and enabling than it has been. The global expansion of IFB and in particular its expansion westwards into Europe is in all probability irreversible; re-trenchment to Asia, the Middle East or Africa is not likely given the success, global visibility and credibility, and the potential profitability of western and international markets. Those factors leading to the cumulative but still modest success of London in particular as a centre of IFB will most probably (at worst) be unaffected by Brexit.[3]

The approach that the government has taken from the outset is to treat IFB with parity along all dimensions, relative to conventional financial institutions; significant legal, regulatory and tax reforms have been effectuated in order to achieve this object and to facilitate IFB in this jurisdiction. The sovereign sakk is evidence of a facilitative stance, if not one of active promotion. On the strength of this assertion, domestic IFIs will not be rendered less competitive than their domestic competition (which may include international banks) due to government intervention. To the extent that banking and finance (and the conventional competition of IFIs here) leave the City of London or de-camp to other financial centres in the EU (Dublin, Paris, Frankfurt or Luxembourg), it may in fact become easier for IFIs to compete in retail financial services as the demand for these is unlikely to reduce even as the supply of financial services in general would be reduced under these circumstances, with IFB being consequently rendered more competitive rather than less. Some observers suggest that “[t]alk about rivalry over the location of the Islamic Finance hub in Europe has been overstated. The UK, Luxembourg, Ireland, the Netherlands and other European locations are complementary to the Islamic Finance industry by offering different advantages.”[4] Of course Continental European destinations are not the only possible alternative to London, and the City based banking industry could consider New York, Singapore or Hong Kong as well.

The current UK based IFIs would be unlikely to relocate to these destinations or to be harmed by the departure of conventional financial institutions to points outside Europe. Singapore has already experimented with IFB but not with great success. Hong Kong has not and lacks a substantial domestic Muslim demographic. The United States has not taken the steps that the UK has to accommodate IFB, and IFIs are few in number and small in scale (despite attempts to grow the industry) so New York City would not hold greater appeal than London.

Whether IFB becomes more attractive than it now is and can secure greater market share, including but also going beyond the minority Muslim population of this country, is largely dependent upon its own success in marketing, reducing costs, and the innovative creation of products that identify and respond to needs in the market for both financial services and investment. Although still a niche sector the reasonable assumption is that IFIs will become more rather than less effective at attracting market share and growing, by virtue of institutional learning and the current starting point which is fairly characterised as a low base, and a comparatively short history in this country.

In regard to those IFIs that are based in Britain but depend more directly or indirectly on investment and business from outside of the country, the potentials have greater amplitude and those potentials may be either positive or negative. Whether Brexit will be correlated with IFB growth or retrenchment will depend to a greater extent on the unknowable details of the UK’s unfolding relationship with the EU and with individual EU member states. In this case, even presupposing (as presently appears most plausible) a “hard Brexit” where the UK loses membership in the Customs Union and stands in relation to the remaining EU member states as any other country, such as (for example) the US or Japan; IFIs in Britain will have to respond by becoming more productive and competitive in the domestic market in the first instance and in the second instance more agile and entrepreneurial in capturing business and capital from outside the European Economic Area (EEA).[5] A hard Brexit is likely to have a stronger differential impact on conventional banks with cross border transactions as they are presently more thoroughly integrated and invested in the EEA than are IFIs. Another set of considerations suggesting optimism regarding the prospects of IFB in a post-Brexit Britain are the commercial linkages of IFB with “non-EU countries in Asia, Africa and elsewhere with robust growth prospects in Shariah-compliant finance.”[6]

Within the UK, the perceived value and importance of international IFI and capital flows from countries where IFB is important is more likely to increase relative to the current baseline than it is with respect to conventional banking and financial services. The relevant ministries of trade and foreign affairs have already begun re-orienting towards the world beyond Europe, both to the Arab Gulf and to the Commonwealth countries — certainly New Zealand and Australia, but also India to name some that have become apparent in these early days. The appeal of the Commonwealth countries and the existing ties that Britain has with these countries is easily ascertained; a large number of these countries[7] have substantial Muslim minorities or are in fact Muslim majority societies, some of which (in an indicative list: Malaysia, Brunei Darussalam, Pakistan, Bangladesh and Singapore) already have extensively developed IFB infrastructure and business. And Commonwealth countries share multiple connections with the UK, in terms of trade in goods and services but also of labour and migration; arguably these connections were rendered secondary by Britain’s accession to the EU under the European Communities Act of 1972,[8] and Brexit is an occasion to restore these relationships to their historical and (at least arguably) natural importance and value for Britain. The Privy Council will remain the final Court of appeal for the preponderance of Commonwealth countries. The historical ties that have made English law popular as a choice of law and the English Court popular as a choice of venue in IFI contracts will not be diminished by Brexit, as these provisions have generally not been predicated upon Britain’s proximity or relationship to Europe nor upon the enforceability of judgments from Britain in the EU or EEA. The English language has been an estimable attraction, particularly as Commonwealth countries often feature English as the (or one of the) official languages. Post Brexit, English will remain the preserve of this country in the European region and likely to remain secondary in the EU; it is even within the realm of contemplation that French would gain in importance to the detriment of English in an EU without the UK.[9] As a common law country in contrast with the dominance of civil law systems in the post-Brexit EU,[10] England and the English courts are likely to continue to be preferred over that of EU member states, as is the case now.[11] In relation to the City of London it is plausible that those factors leading to the moderate successes of London as a centre of IFB as set out in this Addendum (and in Chapters 3, 4 and 10) will be unaffected or enhanced.[12]

The main issue regarding those IFIs domiciled in the UK but with an international reach into the EU is that of passporting under current EU law. Under the current regime financial institutions have “passporting” rights which means that once their products and services are authorised in the UK they are able to freely export these products to other EU member states. This is not likely to be the case in future no matter how favourable the arrangement the British government is able to negotiate with the EU. Because the volume of such expertise has been a relatively small portion of IFIs’ business the loss of this privilege does not constitute a major setback.[13]

Among IFB professionals the dominant although not the unanimous view is that the loss of passporting rights to the EU (which is likely but itself not certain as it is a matter of negotiation) will not have a negative impact on IFIs and on the UK-domiciled IFB industry.[14] The pound sterling which has dropped 20% against the USD since the referendum[15] and is likely to drop further (perhaps even to parity with the USD) after the triggering of art 50, may help this country to attract more foreign direct investment (FDI) from outside the EU, including from the Arab Gulf,[16] and a portion of this may be attracted to IFB and investments and projects mediated or financed by IFIs.

It is evident that there are many more uncertain than certain variables and that as with the process and consequences of the United Kingdom’s departure from the EU making predictions at this early stage is indubitably fraught with peril. However taking a somewhat longer view the trajectory of IFB in this jurisdiction appears more favourable than unfavourable, depending upon the alacrity and ingenuity with which IFB participants and stakeholders strategically plan and react in response to events, which promise to unfold rapidly. The fundamentals comprising the legal and regulatory treatment and governmental posture towards IFB are unlikely to change and if they do change there is reason to believe the changes will be favourable for the industry rather than adverse.

[1] On the assumption the process is not rescinded. This is certainly not an uncontested projection and some observers see it as unrealistic, anticipating a much more lengthy duration (subject to the by no means easily acquired permission of the European Council required by s 3). On the complexities involved and on opinions from several constitutional expert opinions see A. Barker, “What a British divorce from the EU would look like,” Financial Times, 28 June 2016. Also A. Frimston, “Preparing for the UK’s Brexit Negotiation” Chatham House webpage, 5 August 2016 — (Accessed 18 February 2017). For the government perspective and elaboration of the meaning and implications of art 50 TEU: HM Government, “The process for withdrawing from the European Union” at (Accessed 18 February 2017).

[2] House of Commons Library, “Legislating for Brexit: the Great Repeal Bill” (Accessed 20 February 2017). On the delegated powers to be claimed in this Bill, see Procedure Committee (Commons), “Delegated powers in the ‘Great Repeal Bill’ inquiry” (Accessed 21 February 2017).

[3] For a representative view: a CEO of a UK listed asset management company states “Since the early 2000s, the UK’s Islamic finance ambitions have been driven by the development of a strong legislative framework that allows for Islamic finance to operate on a level playing field. This does not change as a result of Brexit.” Qtd in B. Flanagan, “Islamic banks in London reject Brexit fear” The National July 7 2016 – (Accessed 18 February 2017). The same article reports that the Bank of London and the Middle East stated it will continue operations in London despite Brexit.

[4] J. Lawrence, N.R. Boyd, S. Mabin, A. Hussain, “Brexit and Islamic Finance”

11 July 2016, (Accessed 18 February 2017). These authors contend that “The distinctiveness of London has arguably been enhanced by Brexit and investment opportunities increased. Luxembourg is already the leading non-Muslim domicile for Islamic-compliant investment funds and third largest globally behind Saudi Arabia and Malaysia. It is also a popular location for listing sukuk on the primary market. However Luxembourg does not have the direct investment targets of real estate and corporate opportunities that the UK possesses.” This article also highlights the fact that other EU real estate markets such as “France, Germany and Italy may have interesting opportunities however those jurisdictions suffer from tax and legislative hurdles to the use of Islamic Finance.”

[5] The EEA includes the EU members states plus Norway, Iceland and Liechtenstein; “Countries in the EU and the EEA”, (Accessed 20 February 2017).

[6] S. Jaffer, “Brexit and London’s Role as an Islamic Banking Hub: Is the glass Half Empty, or Half Full?” Quoting the Alternative Investment Managers Association (AIMA): Brexit “will enable the UK to take opportunities to negotiate and sign free trade agreements with other key financial and non-financial jurisdictions globally – potentially including the provision of financial services.”

[7] The Commonwealth, “Member Countries” — (Accessed 20 February 2017).

[8] Chapter 68.

[9] However considering both the contemporary distribution of IFB and the countries with which France rather than Britain has post-colonial ties, the Francophone world appears to be less fertile than the Anglophone world for the present and likely future of IFB.

[10] A variety of other considerations are than upon both in relation to litigation and arbitration, from the perspective of the English Bar in the General Council of the Bar’s publication, “The Brexit Papers,” available at (Accessed 18 February 2017).

[11] A similar set of considerations are raised in a note by KL Gates: “most fundamentals have not changed: Islamic Finance has never been governed by EU law in the UK or elsewhere; The UK has one of the most Islamic friendly legal environments with the most legislation of any of the EU countries to assist Islamic Finance from a political and tax perspective; The English language, English law and the English courts remain attractions for overseas investors. The need to attract investment is more important than ever.” J. Lawrence, N.R. Boyd, S. Mabin, A. Hussain, “Brexit and Islamic Finance”

11 July 2016, (Accessed 18 February 2017).

[12] For a representative view: quoting the CEO of a UK listed asset management company — “Since the early 2000s, the UK’s Islamic finance ambitions have been driven by the development of a strong legislative framework that allows for Islamic finance to operate on a level playing field. This does not change as a result of Brexit.” B. Flanagan, “Islamic banks in London reject Brexit fear.” The same article reports that the Bank of London and the Middle East stated it will continue operating and being based in London, notwithstanding Brexit.

[13] Based on various interviews quoted in op cit. Admittedly this was soon after the referendum and many similar views have not been reported more recently; this does not necessarily mean the early views have changed, and the reasoning cited would appear to still be valid despite developments since the referendum.

[14] S. Jaffer, “Brexit and London’s Role as an Islamic Banking Hub: Is the glass Half Empty, or Half Full?” 2 August 2016: (Accessed 18 February 2017).

[15] Forex data sourced from (Accessed 19 February 2017).

[16] “a cheaper sterling has generated considerable opportunities for international investors both from the Islamic world and elsewhere. Shariah-compliant real estate investors, for example, are said to be appraising the wealth of opportunities that have been prized open in the UK arising from a combination of the exchange rate volatility and declining property prices.” S. Jaffer, “Brexit and London’s Role as an Islamic Banking Hub: Is the Glass Half Empty, or Half Full?”

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