Brexit: bane or boon?

Brexit: bane or boon for Islamic finance and banking?

What follows is an unedited version of an article to appear in The Journal of International Banking Law and Regulation in July 2017.

1) Introduction

The offering of financial services and investment compliant with Islamic law or shari’a (Islamic finance and banking — ‘IFB’) commenced in the United Kingdom when the Birmingham based Islamic Bank of Britain became the first Islamic financial institution (‘IFI’) to receive its banking licence; it commenced deposit taking and commercial operations in 2004. Assets and customers held by this sector have slowly accumulated although these are still modest in comparison to those of conventional financials. Legislative and regulatory reforms have demonstrated the British government’s aim to build upon the existing base. The sovereign sukuk in 2014,[1] the government guarantee of a sukuk the following year,[2] and plans to develop a Bank of England credit facility for IFIs within the next two years[3] reflect the continuity of this policy commitment. However in this as in other sectors the planned abandonment of membership in the European Union (‘EU’) generates uncertainty and raises manifold questions. The purpose of this article is to outline the likely impact the nascent negotiations regarding the UK exit and its replacement with new agreements, and the impact of a new British relationship with the remaining EU 27 member states will have on IFB and on IFIs operating in or from this jurisdiction. Following this introduction stating the problem, this article unfolds in four sections: 2) Brexit timetable; 3) Recent developments in global and domestic IFB; 4) Brexit: bane or boon for IFB?; and 5) a Conclusion.

2) Brexit timetable

IFB and IFIs will remain subject to EU law and — in the absence of any (unanticipated) amendments in EU and UK law — this position will remain unchanged in this jurisdiction through March 28 2019, two years from the date when Prime Minister Theresa May issued notice to the European Council that the United Kingdom intended to leave the Union (‘the interim period’)[4] in accordance with the notification requirement of art 50 s 2 of the Lisbon Treaty.[5] However governmental and corporate preparations and responses in the course of the shifting and potentially volatile interim period[6] indicate the growing awareness that negotiations will both cause and be informed by incomplete and asymmetric information. This article seeks to consider both the continuities and ruptures in the strategies and operations of IFIs domiciled in or operating from the United Kingdom both during the interim period and in possible future scenarios following the conclusion of EU arrangements with post-Brexit Britain. The implications of Brexit for a competing irredentism, that of Scotland, and for a proposed Scottish referendum regarding independence are not considered here; nor is the impact of Brexit or Scoxit for IFB transactions in the remaining 27 EU member states. To be sure each one of these matters are resistant to prognostication. However Scoxit, should it transpire, is likely to have few significant implications for IFB, due to the lack of penetration of IFIs in Scotland[7] and the absence (for cross border deals) of a financial centre of London’s global scope and magnitude in Scotland. IFB is also of less importance (with the possible exception of the funds sector in Luxembourg) in any continental European jurisdiction[8] as will be further evidenced in relation to the steps (unequaled in the European Economic Area) taken by Britain to foster IFB in this jurisdiction.

3) Recent developments in global and domestic IFB

A) Global

Worldwide there are 1,329 IFIs, with assets worth £2trn.[9] The centre of gravity of this financial subsector as measured by market participants and volume is decidedly weighted towards Southeast Asia (principally Malaysia) and the Arab Gulf.[10] In terms of deposit-taking institutions, current areas of growth centre upon new entrants in countries with Muslim majorities or substantial minorities; within these the unbanked are a demographic of particular importance. As one example, the shari’a compliant banking sector in Morocco is relatively robust, and has entered an expansionary phase in Mauritania.[11]

The single most consequential constellation of developments however in the last two years has been that created by the precipitous decline in energy prices.[12] Correlated with the fall in energy prices global IFB as a whole slowed during the last quarter of 2016 and the first quarter of 2017.[13] The sukuk (loosely glossed as an Islamic bond, which falls to be regulated as an Alternative Finance Investment Bond under UK regulations)[14] has been the most prominent and arguably successful of the innovations of modern IFB and also that which has been most exposed to energy markets.

Analysts have been divided on the cyclical or countercyclical tendencies of the sukuk market in relation to energy prices.[15] Some forecast a continued decline through the second and third quarters of 2017.[16] Whilst it is evident that on a global scale there has been a correlation between energy and sukuk markets, reductions in sukuk volume and issuance have been neither as celeritous nor as extreme as the drop in energy markets. There are also notable exceptions to this broad trend reduction, with increases in sovereign sukuk issues in several key countries: Pakistan, Indonesia and Malaysia.[17] The largest of the oil majors, Saudi Aramco, has planned a public sukuk issue of USD$2 b expected within months; this is on the heels of a sovereign sukuk in 2016 worth USD$17.5 b.[18] The Kingdom of Saudi Arabia (‘KSA’) and its effort to tap conventional and Islamic debt markets are also a partial counterexample that is instructive regarding the causal relationship of oil prices and sukuk; Gulf Cooperation Council countries (‘GCC’) including KSA are seeking to diversify their economies, as well as to fill those gaps left by shortfalls in budgeted and historic energy revenues.[19] KSA is an important instance then of how and why the relationship of sukuk volume and frequency of issuance on the one side of the equation and energy prices on the other may express an inverse — that is, a countercyclical — relationship.

Some analysts seek further causes for recent declines in sukuk with reference to the lack of standardisation of instruments and to the complexity of sukuk structuring.[20] However standardisation has been slowly increasing with the actions and cooperation of the leading standards setting organisations — the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) and the Islamic Financial Services Board (IFSB). In addition with some prominent issues that have taken place[21] the unfamiliarity (which is sometimes mistaken for complexity) of sukuk is also reduced;[22] the increasing familiarity and as it were mainstreaming of sukuk is further evidenced by the variety of nationalities of legal and human persons subscribing to sukuk. Furthermore the diversity of sukuk structures and the lead time required to arrange sukuk (which is greater than a conventional bond issue, with one year not being atypical) cannot account for the current decline in growth as these factors pre-date the recent (measured) decline in global sukuk markets.

B) Domestic

Although modest when compared with the conventional banking sector, the number of IFIs in this jurisdiction is large when compared with most other countries that license IFIs. There are six licensed Islamic banks in this jurisdiction with a total of twenty offering Islamic financial products and services; [23] these numbers exceed those of any other country in Europe or the Americas. Some retail Islamic banks are — with some success — staging a campaign to cross market demographics and to attract new customers, with offers of relatively high profit rates on current accounts.[24] On the retail front the successor to the Islamic Bank of Britain (under Qatari ownership since 2014)[25] Al Rayan, is one such bank.[26]

Islamic mortgages were the first product introduced into Britain; the government undertook regulatory reforms (principally a partial exemption from Stamp Duty Land Tax) making this IFB product viable in this jurisdiction in the early years of the twenty first century. This was followed by the licensing of the Islamic Bank of Britain in 2004.[27] The next initiative was preparation for the sovereign sukuk, which served as an only modestly successful signalling device to corporate issuers, and more successfully as a means of competing with other exchanges and jurisdictions for the (cross-) listing of sukuk. In the current environment the application of financial technology (fintech) to IFB is gaining momentum, as evidenced by Beehive — a peer-to-peer financing platform; it has a specially designed window for transactions compliant with Islamic law, offering commodity financing.[28]

There have been 65 sukuk listed on the London Stock Exchange (‘LSE’), with a combined value of USD$48 b.[29] The LSE includes seven shari’a compliant Exchange Traded Funds, a Shari’a Global Index Series (with the cooperation of a shari’a consultancy partner), and shari’a compliant screened equities in the Russell Islamic Global Indexes.[30] In addition to the sovereign debut in 2014,[31] and the government guarantee of Al-Khadrawy Limited sukuk last year,[32] the commitment extends into the future — as demonstrated by the on-going consultation and planning to develop a Bank of England credit facility for IFIs.[33]

4) Brexit: bane or boon for IFB?

Given the importance of banking and the position of London as world financial centre there is significant concern about the impact of Brexit on the City, crucially in relation to tax receipts and to (in-) direct employment.[34] Building upon the factual information and the analysis set out in the previous sections of this article, section (4) claims that — notwithstanding the wide range of possible results from Brexit processes — Brexit is more likely to be facilitative and positive both in the interim period and beyond for IFIs operating in and from the UK and to this extent for IFB.

At the same time a caveat should be attached: it should be recognised that the impact of Brexit on IFB is not structurally determined. There is a large role for preparatory action, planning as well prudent responses to macro economic transformations; agility and resilience in coping with volatility in the material business sectors, and in the fortunes of retail customers, will both be of crucial importance to the survival and flourishing of IFIs. The history and characteristic structure of IFB, as a central implication of Islamic legal compliance and its insistence on anchoring products and transactions in real assets, is that IFIs are more conservative, more fully capitalised and less leveraged than their conventional counterparts, which makes them at once less profitable and at least potentially more resilient in turbulent economic circumstances.[35]

A) Passporting and EU law in relation to UK based IFB

The single legal change following from Brexit after the interim period which will most significantly impact banks is the loss of passporting privileges; the right under which financial institutions authorised under UK regulations are (without more) authorised to operate in the other 27 EU member states, and vice versa. The loss of passporting is probable although not definite. On the assumption that financials licensed or operating in the United Kingdom lose the passporting right the increase in compliance costs would likely render current operations more costly, weakening competitiveness, and banks would be forced to relocate some or all (subject to negotiation) of their operations to EU member states — if seeking to do business there. This would only represent a detriment to IFB to the extent that IFIs now avail of passporting. However ‘European passporting has not been of significant importance to domestic Islamic banks in Europe since their operations are typically confined to the home market and are not typically pan-European […] As a result, deposit taking should not necessarily be affected by Brexit.’[36] Except to the extent that EU regulations are incorporated into UK law (and the extent to which they will or will not continue to be following the interim period), EU law governs and will govern only IFIs incorporated or operating in the EU 27.[37]

Since there has been little to no reliance on the part of IFIs in the UK upon passporting, supposing that the attractiveness and operations of conventional banks competing with IFIs is diminished, it could be a net gain for IFB in the UK. It might be added that there have been few IFIs opening in Continental Europe, even though the Muslim populations are greatest in France and Germany — with the Muslim population in Britain being third in magnitude in the current EU.[38] This is evidence that government action and the policy orientation (together with London’s standing as a global financial centre) have been more decisive in the development of IFB than the size of the retail market.

B) Attractive features of UK for IFB that are likely to continue or to increase

The attractions of this jurisdiction for IFIs and for its inclusion in the choice of law and court provisions in IFB contracts are multiple. Through the interim period they will not depend to any greater extent upon EU rules or legislation than they did prior to the triggering of art 50 s 2 — as explained in relation to passporting in section 4(A) above. After the interim period there is no reason to believe that the only applicable law and regulations (those of the UK) will become any less favourable towards IFB than they are now. Section 4(B)iv below will contend there is on the contrary some reason to conclude that investment imperatives and opportunities will in fact make IFB more important and attractive than the conventional banking sector and other traditional forms of cross border business, after the interim period. This may translate into the relaxation of the regulatory regime in which IFB operates; lighter touch regulation would reduce compliance costs and those tax and other regulatory burdens currently born by IFB products. IFIs could in fact become more competitive, larger, and more profitable.

C) Common law, English contract law and courts

English contract law is well known to be a popular choice for IFB contracts even in cases where neither party nor performance of the contract has any connection with the UK. ‘English law and the English courts remain attractions for overseas investors.’[39] The partly historical, partly contemporary explanation for this popularity is that former territories of the British Empire, many of which upon independence became (and remain) members of the Commonwealth, adopted English as the or as an official language, and maintained or further developed legal systems based upon the common law. In the case of the South Asian subcontinent under British rule such a hybrid legal system was known as Anglo-Muhammadan law, which has left its legacy in both India and Pakistan, with the latter being a particularly consequential player in global IFB. The same history is evident in residual traces and legal culture in other formerly British rules countries with Muslim majorities or significant Muslim minorities, now occupying countries that are members of the Commonwealth: Asia (Brunei Darussalam, Bangladesh, Malaysia, Singapore), and Africa (Mauritius, Nigeria, South Africa).[40] Each of these countries features IFB activity.

An additional category of countries is former protectorates or territories with pre-independence relations to Britain that are neither members of the Commonwealth nor common law legal systems; principally the Arab Gulf, now combined into the Gulf Cooperation Council (‘GCC’) countries. Each of the GCC states[41] is based in a civil law system. Each features a dual banking system with a (smaller) Islamic sector operating alongside a (larger) conventional banking sector; as will be seen the governments and sovereign wealth funds (‘SWF’) of some of the GCC states are already substantially invested in Britain, whether by shari’a compliant or other means.

Both as a means of attracting foreign direct investment (‘FDI’) and as a means of competing with other aspiring financial centres with a specialism in IFB,[42] the government has sought to create a system that treats IFB with neither prejudice nor favour.[43] ‘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.’[44] As the presently dominant world language, English is an additional attraction for legal, accounting and other support services and the documentation required for IFB transactions.

D) Human capital and the education sector

The concentration of human capital in Britain, in its regional economic centres and particularly in the City of London have been a resource that has facilitated existing growth in IFB in this jurisdiction. In advocating the City of London one observer summarises this point and those set out in 4(B)i above: ‘The talent of the people here, a stable rule of law, the quality of the judicial process and exceptional infrastructure are what give us our advantage.’[45] In addition to the legal profession (paralegals, barristers, solicitors, court personnel), regulators and civil servants, banking management, accounting firms, consultancies, and the overall compliance and financial infrastructure[46] comprise human capital which can and do support IFIs and assist in maximising the economic value and benefits of this sector in terms both of domestic growth and the attraction of FDI to this country.

Since global IFB has evolved within a framework created by and for the fractional reserve banking system and securities markets, knowledge of conventional banking and finance are mainly transferable to the operation of IFIs, provided that existing standards and practices are supplemented with knowledge of the compliance requirements of IFB. Notwithstanding the prestige of the Arabic language for Islamic religious purposes, the contemporary standards to which Islamic legal scholars serving on shari’a boards routinely refer are available in English, and in succinct and readily comprehensible form, from the IFSB and the AAOIFI.[47] A related strength and mechanism for the creation of continued and increasing human capital is the British educational sector and its offerings in law and business schools in relation to IFB.[48]

E) LSE, location and time zone

Although the role of the LSE as a premier exchange for listing of sukuk is not immune to challenge, the fact that 65 sukuk have been listed here notwithstanding the significant compliance costs is a result of the attraction of the credibility conferred by an LSE listing and the access it provides to deep pools of liquidity and to institutional investors seeking portfolio diversification. Given the global nature of Islamic finance the advantages offered by London are the same for this niche sector as for trade, finance and investment that does not purport compliance with Islamic law; in addition to the regulatory and legal framework in which this exchange is embedded its location and time zone are incidental attractions. The ability to communicate and to trade in all time zones (except Australia and New Zealand) in the course of a single working day is an important advantage; in relation to IFB the geographic proximity to Africa and the Middle East as well as to the Americas and Europe are material advantages not possessed to the same degree by Kuala Lumpur, Singapore, Hong Kong, Bahrain, Riyadh, Dubai or New York.[49]

F) Foreign trade and investment, developments in forex and property markets

One development that pre-dated the triggering of art 50 s 2 was the fall in the pound sterling against the USD, which makes this jurisdiction more attractive for investors holding USD pegged currencies — these include several of the GCC countries: Qatar, KSA and the UAE. Property values continue to grow as of this writing but appear to be peaking, with the rate of growth slowing in advance most probably of a gradual decline. There is a ‘predicted short to mid-term decline in UK real estate values.’[50] The valence attached to this forecast is of course perspectival. For buyers this is an opportunity. In recent history whilst a variety of nationalities have invested in UK property, both sovereign and private buyers from the GCC are significant players at the higher end of the market. As a somewhat out of date but still a suggestive indicator: an excess of 80% of the USD$4.5 b spent by GCC sovereign wealth funds in global real estate in Q4 2014 was spent in Europe, and over USD$3 b (67%) was spent in London alone where ‘the number of Middle Eastern buyers rose from 11% to 16%.’[51] These statistics themselves do not establish the importance of IFB however they are evidence of inward capital steams from GCC countries, several of which feature the world’s largest SWFs, notwithstanding recent events in oil and gas markets. The UK government which has, as indicated already, played an important role in the initiation of IFB in this jurisdiction, and is manifestly inclined towards the GCC countries as a source of inward investment. The British government is currently seeking ‘a broader trade agreement with the Gulf Co-operation Council, of which Saudi Arabia is the largest member.’[52] Qatar, as another example, continues to invest in UK property and businesses.[53] Whilst it is not the case that every investment from a GCC national or SWF will be shari’a compliant, there is an open and active capital stream, which the government seeks to maximise, a substantial proportion of which has historically (and is likely to be in the future) augmented by means of shari’a compliant financing.

As a broader observation, counterparties that are not based in the EU 27 represent a less fraught alternative, certainly within the interim period and probably beyond.[54] It should also be noted that: ‘The UK has a particular need for infrastructure improvements. With the potential loss of EU funds for infrastructure then Islamic Finance techniques are ideally suited to draw investment to this area of the economy.’[55] The existence of an opportunity does not guarantee that the opportunity will be taken. However Brexit makes it more rather than less likely that the existing channels of investment and trade set out in this section will be explored, and utilised to a more maximal extent as a result of incentives incidental to Brexit.

G) Islamic dispute resolution

As a secular jurisdiction the appeal of English contract law and courts as set out in section 4(B)i above is not due to expertise regarding Islamic law but rather because of its consistent and categorical refusal to adjudicate matters of Islamic law and shari’a compliance in IFI contracts. The English court will only apply national law; Islamic law is not national law and therefore will only fall to be adjudicated by the judge of an English court if it has been incorporated as a contractual term, in which case the usual English laws and techniques of contractual construction applies.[56] The number of IFB disputes heard in English courts can be counted on two hands. This is a consequence of the small number of disputes on cross border IFB contracts that have arisen, and also because arbitration is an available and a more attractive proposition to most parties to an IFB contract.

Although still at an early stage it is likely that IFB will follow a trajectory similar to that of other business sectors away from litigation and court based dispute resolution methods and towards arbitration — as a less costly, less time consuming alternative. In fact because ADR is widespread and well known in many economic sectors today, combined with the fact that there is a clear need for specialist legal expertise in Islamic law in relation to IFB disputes, the advent of ADR and an Islamic variant known as Islamic Dispute Resolution (‘IDR’) is likely to be swifter and more complete than it was in the case of secular sectors moving towards binding and non-binding forms of ADR.[57] As IFB transactions have increasingly involved multiple jurisdictions, some of which have weak legal systems (in part explanation for the popularity of English choice of law and court provisions in IFI contracts) including, crucially, flawed or non-existent insolvency law, the attraction of IDR becomes more apparent. This appeal is further enhanced as IDR also permits the parties to contract out of the greater shari’a non-compliance risk entailed by litigation in this (or for that matter in any) jurisdiction. Negative covenants not to litigate and positive covenants to arbitrate disputes, together with an arbitration agreement incorporated into IFB contracts, are likely to increase.[58] A further reason for this prediction is the greater use of IDR provisions in leading IFB jurisdictions such as Malaysia, and the establishment of dedicated IDR centres or ADR centres offering IDR services.

The British Parliament, government and courts have promoted ADR, being a relatively early adopter with the Arbitration Act of 1996 (‘the 1996 Act’), and encouraging parties to attempt ADR before litigation by means of amendments in the Civil Procedure Rules[59] and the use of costs orders to punish parties refusing reasonable offers of ADR.[60] Under s 19 of the 1996 Act the court must have regard to arbitrator(s)’ qualifications agreed by the parties. An arbitral agreement providing for the selection of an arbitrator (or express identification thereof) on the basis of his or her religion and expertise in Islamic law would be permitted.[61] Therefore the United Kingdom is — in addition to being a jurisdiction that favours ADR — one that is also (as with the position towards IFB) unbiased if not likely to be actively supportive of IDR as a means of resolving disputes in IFB contracts.

H) Symbolic significance as policy imperative

This article has considered potential economic benefits of IFB as a reason for government to continue consultations and plans, and to sustain existing policies that facilitate the operation and development of IFIs and IFB. The benefits however, from the standpoint of social policy, may extend further to include the symbolic value of IFB as a means of social inclusion and as a counter and a corrective to narratives of violence and extremism sadly all too often apparent in the contemporary world, including in Britain. There is regrettably at present a sporadic drumbeat of small scale but lethal and damaging attacks directly or indirectly inspired by Islamist ideology and radicalisation under its auspices.[62] Whilst this article concerns itself with the commercial elements of the banking business it should be observed en passant that there can be a policy nexus to these concerns, and symbolic value in re-directing efforts away from extremism and towards the creation and distribution of wealth by means of financial services and investments consonant with Islamic principles and beliefs.

5) Conclusion

Whether having regard to its retail, commercial or investment varieties, banking advances by means of real economic growth. Whilst predictions regarding the economic impact of the Brexit referendum have been called into doubt, and this may highlight the fact that economic forecasting is more an art than a science, it does not follow from this that less than sanguine predictions about the interim period and what succeeds it are wrong nor that they can or should be disregarded. The macro impact of Brexit uncertainties and volatile day to day developments in UK-EU 27 relations will affect all banking subsectors including IFB. However this article has set out reasons why the impact on IFIs operating in and from the UK is likely to be less negative than for those conventional financial institutions operating from the UK into the EU 27; those financial institutions which are currently relying upon the benefit of passporting.

This article surveyed recent developments in global and national IFB identifying existing flows of capital and financial services which both the British government and private sector may and in some cases (including GCC countries) are already seeking to more fully activate and tap. This article highlighted the London property market and the demand for infrastructural investment. The listing of sukuk on the LSE and their structuring, offer and issuance have been supplemented by additional LSE offerings and continuing tax and regulatory policies favourable towards IFB, including an on-going consultation regarding a Bank of England credit facility for IFIs. English law, courts, this jurisdiction’s favourable attitude towards ADR, location and time zone, human capital, and historic ties with Muslim majority societies are features not displayed (or displayed to a lesser degree) by financial centres and jurisdictions competing with the UK for IFB business.

Although there is no single action or sector that can solve the puzzles and immediately meet every challenge posed by Brexit, whether during the interim period or beyond, a mosaic of measures must be composed and created in response to it. IFB comprises a probable and promising piece in such a mosaic. To conclude: Brexit appears to be more boon than bane for IFB. More importantly, this article has also claimed the corollary: IFB is more boon than bane for a post-Brexit United Kingdom.

Scott Morrison

[1] Scott Morrison, ‘The UK’s First Sovereign Sukuk Issue,’ Counsel (May 2014), 21-23; ‘The Upcoming UK Sovereign Sukuk Issue’ Journal of International Banking Law and Regulation (London: Sweet and Maxwell), Vol 29 Issue 7 (2014), 362-366. This issue is also treated in ‘Debut Sovereign Sukuk in 2014,’ Journal of International Banking Law and Regulation (London: Sweet and Maxwell), Vol 30 Issue 3 (2015), 122-127.

[2] Guarantee by the Export Credits Guarantee Department of the UK Government; financing four Airbus A380-800 aircraft for Emirates Airlines. Prospectus available at (Accessed 9 April 2017).

[3] As an effort to attract business from Southeast Asia and the Middle East. It is currently in consultation (until 23 May 2017). ‘It would help Islamic lenders meet regulatory requirements of liquid asset buffers’ — Bernard Vizcaino, ‘Bank of England plans liquidity tool for Islamic banks’ Zawya 6 April 2017.

[4] BBC News, ‘Article 50: UK set to formally trigger Brexit process’ 29 March 2017, (Accessed 12 April 2017).

[5] The Lisbon treaty was published in The Official Journal of the European Union, C 115, Volume 51, 9 May 2008. Art 50 available online at: (Accessed 9 April 2017).

[6] Of the next sixteen or seventeen months, the time period in which both UK and EU representatives aspire to finalise the agreement.

[7] There is a branch of one IFI, Al Rayan bank, in Glasgow — (Accessed 12 April 2017).

[8] The first IFI in Continental Europe began operations in Germany in 2015. See note 37 below

[9]According to ICD Thomson Reuters data, as reported by Dominic Dudley in ‘Islamic finance’s growing pains’ Economia, (Accessed 11 April 2017).

[10] Loc cit. ‘With Saudi Arabia, Iran and Malaysia together accounting for $1.3trn of total assets.’ Unlike the dual banking systems of the preponderance of jurisdictions where IFIs are licenced Iran (together with Pakistan and Sudan) comprise minority jurisdictions in that they purport comprehensive Islamic legal compliance. It would be beyond the scope of this article to consider how sect and Islamic legal schools, particularly in the Shi’ite theocratic constitutional state of post-Revolutionary Iran, is distinguished from the Sunni sect and legal schools. On the Iranian case, see draft paper, Scott Morrison, ‘The Galapagos of Islamic Finance?: the Islamic Republic’s banking system,’ to be presented at the Association for the Study of Persianate Societies annual meeting in Tblisi, Georgia in March 2018.

[11] On 2 January 2017 Morocco’s Central Bank, Bank al-Maghrib, announced five groups licensed to open sharia-compliant banks — Dominic Dudley, loc cit.

[12] Brent crude dropped by 50% from over USD$100 pb in Q1 2015 and has hovered in the range of USD$40 to USD$50 in 2016 and 2017: (Accessed 9 April 2017).

[13] Babu Das Augustine, ‘Islamic finance faces slowing growth in 2016-2017’ — 10 September 2016, S & P Islamic Finance and Assurance Services. Also: ‘Islamic Finance In 2017; Modest Growth Amid Oil-Price Woes’ 4 September 2016 S&P Global Credit Portal Global which states that ‘The Gulf Cooperation Council (GCC) countries, along with Malaysia and Iran, account for more than 80% of the industry’s [IFB’s] assets.’

[14] Scott Morrison, Law of Sukuk: shari’a compliant securities (London: Sweet and Maxwell, forthcoming June 2017), see Chapter 10 on UK regulation of sukuk, and at B10-009 specifically. By the same author, ‘The Upcoming UK Sovereign Sukuk Issue’ Journal of International Banking Law and Regulation (London: Sweet and Maxwell), Vol 29 Issue 7 (2014), 362-366.

[15] Elaine Moore and Simeon Kerr, ‘Saudi Arabia plans bond deal to help finance deals’ 10 January 2017 Financial Times. The sukuk are planned as part of a programme of bond issuances, aimed at supporting spending to help diversify the KSA economy. Loc cit: ‘Gulf states including Qatar, Abu Dhabi, Oman and Bahrain have all turned to capital markets […] in the wake of falling oil prices and Fitch Ratings believes borrowers in the Gulf are likely to increase sukuk issuances as the market grows — with some companies limited to only shari’a compliant borrowing by their own rules and other issuers keen for inclusion in Islamic investment funds.’

[16] S&P Global Ratings opines that the drop in Islamic finance is likely to continue in 2017, citing two factors: the ‘impact of policy responses to the decline of oil prices in core markets’ and the ‘lack of standardization in the industry, which is still made up of a collection of local small industries’ — ‘Islamic Finance In 2017; Modest Growth Amid Oil-Price Woes’ 4 September 2016 S&P Global Credit Portal, 5.

[17] which ‘sold $9.4 bn of sukuk, according to Dealogic, an increase from $6.3 bn sold in 2015.’ S&P Global Ratings global head of Islamic finance, Mohamed Damak, as reported by Elaine Moore and Simeon Kerr, ‘Saudi Arabia plans bond deal to help finance deals’ 10 January 2017 Financial Times.

[18] Loc cit.

[19] ‘a component in a $10 b fundraising plan; the preponderance is expected to be privately placed among the lead arrangers, including HSBC Saudi Arabic, National Commercial Bank, Riyad bank, and Alinma Bank’ — Simeon Kerr and Anjli Raval, ‘Saudi Aramco to launch first public bond sale’ 21 March 2017 Financial Times.

[20] S&P Global Ratings, Dr Mohamed Damak, ‘Foreward,’ Islamic Finance 2017: Another Difficult Year (2017 edn), 5. See note 16 above.

[21] Two prominent examples are the sovereign issue in 2014 and the private issue guaranteed by the UK in 2015, as indicated in section 3(B).

[22] S&P Global Ratings global head of Islamic finance Mohamed Damak states ‘We believe the complexity of sukuk issuances will continue to weigh on issuance volumes, unless counterbalanced by tangible results on standardisation or the establishment of large issuance programmed.’ Reported by Elaine Moore and Simeon Kerr, ‘Saudi Arabia plans bond deal to help finance deals’ 10 January 2017 Financial Times.

[23] Arno Maierbrugger, ‘What a Brexit could mean for the UK’s aspiring Islamic finance market’ Gulf Times 21 June 2016 (Accessed 13 April 2017).

[24] According to data provided by independent bank account analyst Andrew Hagger, who opines that these banks ‘are offering these eye-catching rates in part to capture the attention of British savers who might otherwise think that Sharia-compliant products are not for them’ — Naomi Rovnick ‘Islamic and European banks hit top of UK savings table’ 11 July 2016 Financial Times. As a function of Islamic legal compliance the return on these Islamic accounts is not guaranteed and is characterised as a profit, rather than an interest, rate.

[25] Reuters, ‘Qatar’s Masraf Al Rayan buys Islamic Bank of Britain’ 16 January 2014.

[26] And late last year opened a new office, in Bradford — Alex Lynn, ‘Brexit “an opportunity” for Islamic finance’ 6 October 2016 Bridging and Commercial‘an-opportunity’-for-islamic-finance. Tom Belger, ‘Sharia-compliant bank opens new office’ 27 September 2016 Bridging and Commercial (Accessed 13 April 2017) states the reason for the new office is ‘to be closer to one of the UK’s largest Muslim communities’ — just under one-quarter of the population are Muslim, with a further catchment area encompassing West Yorkshire; the bank has 70,000 customers. Other IFIs include Gatehouse Bank, the Bank of London and the Middle East, and branches of Middle Eastern banks such as Abu Dhabi Islamic Bank, Mashreq (UAE) and ABC International Bank (Bahrain). Lloyds Bank operates an Islamic window.

[27] On the early development of IFB from a UK regulatory perspective, see M. Ainley, A. Mashayekhi, R. Hicks, A. Rahman and A. Ravalia, Islamic Finance in the UK: Regulation and Challenges (London: Financial Services Agency, November 2007). See also forthcoming book The Law of Sukuk: shari’a compliant securities (London: Sweet and Maxwell, 2017), A4-009 on the UK IFI and IFB landscape and the history of legislative and regulatory reform that has enabled it to become viable. John Dewar and Munib Hussain, ‘Islamic Finance in the UK: the Impact of Brexit’ 16 December 2016, Islamic Finance News. 10 April 2017). The article states that the Islamic Bank of Britain was the first stand alone Islamic financial institution in the EU and ‘has the highest value of Shariah compliant assets of any non-Muslim country.’

[28] ‘commodity murabahah financing backed by the Dubai Multi Commodities Centre’s “DMCC Tradeflow” commodities trading platform, based in the Dubai International Financial Centre (DIFC). If an investor wishes to invest in shariah-compliant transactions only, it can indicate that preference in its profile. Beehive uses the Shariyah Review Bureau, which is licensed by the Central Bank of Bahrain, as its shariah board to review potential opportunities for investment.’ Barry Cosgrave, ‘United Kingdom’ Chapter 8, 68-77 in Andrew M Metcalf and Michael Rainey (eds), Islamic Finance and Market Law Review (Law Business Research) 2016, 70.

[29] (Accessed 9 April 2017).

[30] Loc it.

[31] LSE, ‘London Stock Exchange Welcomes UK Government’s First Islamic Bond Listing’’s-first-islamic-bond-listing (Accessed 10 April 2017): ‘The UK sovereign Sukuk will have a maturity of 5 years and use the Al-Ijara structure, the most common structure for sovereign Sukuk. The Sukuk will be underpinned by rental income from three central government office properties, which will remain in government ownership during the lifetime of the Sukuk.’

[32] Guarantee by the Export Credits Guarantee Department of the UK Government. This sukuk and all those listed on the LSE are available with tenors, volumes, rates and currencies but without reference to the underlying contract types at, ‘Accessing the Global Market Through London: London Stock Exchange List of Sukuks (January 2017), (Accessed 10 April 2017).

[33] Bank of England, ‘Consultation paper: Establishing Shari’ah compliant central bank liquidity facilities’ (February 2016), (Accessed 10 April 2017). Also Bernard Vizcaino, ‘Bank of England plans liquidity tool for Islamic banks’ Zawya 6 April 2017.

[34] Caroline Binham, ‘Claim “hard Brexit” could cost UK £10 bn in tax’ 4 October 2016 Financial Times: £10 b in tax revenue and 71,000 jobs lost from the financial sector.

[35] Prompted by the last global economic crisis, a sizable literature of varying quality has been produced in relation to the relative stability of IFB as compared with conventional banks. These findings are potentially highly relevant as Brexit is likely to impose costs and create volatility in the near and mid term. To cite only one work containing analyses and data on the industry’s performance during the global economic crisis commencing in 2007-2008 and ways to improve it in future, see: Hossein Askari, Zamir Iqbal, Noureddine Krichene, Abbas Mirakhor, The Stability of Islamic Finance: Creating a Resilient Financial Environment for a Secure Future (Singapore: John Wiley and Sons Asia Pte Ltd, 2010).

[36] Interview of Zak Hydari, the chief executive of Rasmala, as reported in Ben Flanagan ‘Islamic banks in London reject Brexit fear’ 7 July 2016, The National.

[37] Therefore it is not accurate to say that ‘Islamic Finance has never been governed by EU law in the UK or elsewhere’ as it is and has been governed by EU law as enacted in the UK and in IFIs operating in European Union ex UK. The quotation is from K & L Gates Brexit European Advisory Group (Jonathan Lawrence, Natalie Boyd, Simon Mabin, and Amjad Hussain), ‘Brexit and Islamic Finance’ (July, 2016). It would be beyond the scope of this paper to inventory IFIs from the EU 27, however one example (purporting to be the first ever ‘in Germany and in the Eurozone’) would be KT Bank which opened in July 2015: (Accessed 12 April 2017). It is a subsidiary of the Turkish company Kuveyt Türk.

[38] In terms of relative percentages: Germany (5.8%, France 7.5%, and Britain 4.8%). Conrad Hackett, ‘5 Facts about the Muslim Population in Europe’ 19 July 2016, Pew Research Centre (Accessed 12 April 2017). This article indicates the Muslim proportion of the population is growing at 1% a decade, with the projection that it will be 8% of the total by 2030; the article does not state whether this projection takes account of Brexit. The article also reports that the median age of the Muslim population is eight years younger (at 32) than the rest of the population. Both reproductive rate and median age are positive indications for retail Islamic Banking to the extent the industry can succeed in attracting Muslim customers.

[39] K & L Gates Brexit European Advisory Group (Jonathan Lawrence, Natalie Boyd, Simon Mabin, and Amjad Hussain), ‘Brexit and Islamic Finance’ July 2016.

[40] The Commonwealth, ‘Member Countries’ (Accessed 12 April 2017).

[41] Oman was the last of the GCC countries to license an IFI and to bring into force the Islamic Banking Regulatory Framework 2012; see Scott Morrison, ‘Oman’s Islamic Banking Regulatory Framework: the Corporate Governance of Shari‘a Compliance in a New Jurisdiction’ Arab Law Quarterly (Leiden: Brill) 29 (2015), 101-137.

[42] With respect to that competition, some observers suggest that London has an advantage over for example Luxembourg, which ‘does not have the direct investment targets of real estate and corporate opportunities that the UK possesses.’ K & L Gates Brexit European Advisory Group (Jonathan Lawrence, Natalie Boyd, Simon Mabin, and Amjad Hussain), ‘Brexit and Islamic Finance’ (July, 2016). In addition this source maintains that ‘Talk 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.’

[43] And in doing so has made IFB products viable; as elliptically indicated in section 3(B). Measures have included aamendments to a succession of Finance Acts and secondary legislation (statutory instruments, PERG guidance, tax provisions), enacted over the last fifteen years. As Zak Hydari 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.’ He is the chief executive of Rasmala, and his interview is reported in Ben Flanagan ‘Islamic banks in London reject Brexit fear’ 7 July 2016, The National.

[44] Loc cit.

[45] Mark Boleat, Policy Chairman of the City of London Corporation states quoted in Sohail Jaffer, ‘Brexit and London’s Role as an Islamic Banking Hub: Is the Glass Half Empty, or Half Full?’ 2 Aug 2016, World Financial Review. – (Accessed 8 April 2017).

[46] Loc cit: ‘Adding to that, a large number of law firms and accountants are involved in the Islamic finance industry in the UK, and, over the past years, universities, business schools and centres of excellence have broadened their offerings in Islamic finance education.’ Arno Maierbrugger, ‘What a Brexit could mean for the UK’s aspiring Islamic finance market’ Gulf Times 21 June 2016.

[47] With the former organisation’s sets of standards and updates freely available online.

[48] See Jonathan Moules, ‘Demand rises for education in Islamic finance’ 3 November 2016, Financial Times, which mentions ‘longstanding courses run by Durham, Aston, Bangor, Salford and Cass Business School. More than 60 institutions in the UK now teach Islamic finance, up from fewer than 10 a decade ago, according to the University of East London, one of the early adopters of the subject.’ This article also refers to London Metropolitan University’s MBA which includes an elective in IFB, stating that it ‘has run courses for the Commercial Bank of Qatar at Doha that involved a comparative evaluation of Islamic and conventional banking’ — reporting interview with the MBA course leader, Hazel Messenger.

[49] ‘The LSE is seen as having a beneficial time zone and good access for European and Asian investors.’ David Sheppard, Anjli Raval and Nicole Bullock, ‘New York and London battle for Saudi Aramco IPO’ 9 March 2017, Financial Times.

[50] Tayyab Ahmed, “How can Islamic finance contribute to UK’s growth post-Brexit’ 16 January 2017, Global Islamic Economy Gateway. Quoting Jonathan Lawrence (Islamic Finance Partner at K&L Gates in London): ‘In the last five years, the UK’s Islamic finance industry has been heavily reliant on the commercial real estate market in the UK in order to drive deals that are structured in an Islamic-compliant way.’

[51] Loc cit. — data from global real estate firm Jones Lang LaSalle. ‘Property consultant Knight Frank confirms that between 2011 and 2013, non-UK nationals accounted for 69% of prime central new building purchases in London, while in 2015 around 63% of residential property purchases over £10 million were non-British.’

[52] Simeon Kerr, Anjli Raval and Henry Mance, ‘May and LSE chief lobby for Aramco listing on Saudi visit’ 4 April 2017, Financial Times.

[53] Kamal Ahmed, ‘Qatar announces £5bn UK investment’ 27 March 2017 — in ‘transport, property and digital technology’ Previously Qatar has invested £40 b, including a 95% stake in the London Shard; Harrod’s; holding stakes in the Olympic Village, the Docklands and in an LNG terminal in South Wales.

[54] Neil Patrick, editor of Saudi Arabian Foreign Policy: Conflict and Cooperation states: ‘in this post-Brexit environment, there is a greater importance placed on trade with friends in the Middle East.’

[55] Loc cit.

[56] The material case is Shamil Bank of Bahrain E.C. vs. Beximco Pharmaceuticals Limited and others [2004] EWCA Civ 19.

[57] See Law of Sukuk, A5-004-005; also Andrew White ‘Dispute Resolution and specialized ADR for Islamic Finance,’ in C.R. Nethercott and D.M. Eisenberg (eds), Islamic Finance: Law and Practice 306-334. See also K.V.S.K. Nathan, ‘Who is Afraid of Sharia? Islamic Law and International Commercial Arbitration’ 59 (1993) Arbitration 125, 130.

[58] Although this is not yet a tendency apparent in a survey of selected LSE listed sukuk prospectuses — see Law of Sukuk, B12-007-008.

[59] Civil Procedure Rules (88th update) available at (Accessed 11 April 2017. ) Pre Action Conduct and Protocols arts 8 and 9 under ‘Settlement and ADR’ are relevant: art 8 states that ‘Litigation should be a last resort’ and places a duty upon the parties to consider ADR to settle before commencing proceedings.

[60] Although access to the courts cannot be denied, ADR can be strongly encouraged. Compare Dunnet v Railtrack [2002] EWCA Civ 302; Halsey v Milton Keynes General NHS Trust [2004] EWCA Civ 576.

[61] Jivraj v Hashwani [2010] EWCA Civ 712.

[62] Some related ideas are developed in the author’s webpage and blog, IDRAK Ltd.; one entry titled somewhat facetiously as ‘“make money, not jihad”: Islamist aggression and Islamic finance,’ was a post in the immediate aftermath of the Paris attacks of 13-14 November 2016: (Accessed 12 April 2017). At this writing, police are investigating jihadist links behind an attack in Germany, one that followed that occurring in Westminster (on 22 March 2017) — ‘Borussia Dortmund attack: police investigate Islamist link’ 12 April 2017 BBC News, (Accessed 12 April 2017).

Previous Post
Comments are closed.
%d bloggers like this: