gif Financial Authority Guidelines
Islamic Finance in the UK:
T
Authors: Financial Services Authority - Michael Ainley, Ali Mashayekhi, Robert Hicks, Arshadur Rahman, Ali Ravalia
he foundations for the fu- ture development of Islamic finance in the UK have been firmly laid. Although the
likely growth cannot be predicted accurately, there is scope for ex- pansion, as set out below.
Retail markets
To date the industry has largely concen- trated on providing mortgage and savings products for retail consumers, and growth has been modest. The tax and regulatory developments already outlined could ben- efit the market and there are signs of firms expanding their product ranges through pro- viding new saving and investment products. Interest-free student overdrafts have recent- ly emerged and there seems to be demand for new products targeted at the personal finance and the small and medium-size en- terprise (SME) markets. Elsewhere in the re- tail market, some regional stockbrokers are providing services to consumers at all levels of the wealth spectrum and some financial advisers are offering tailored advice to the Muslim community.
Wholesale markets
The Sukuk market in London is now well es- tablished. The volume of Sukuk trading is still small but this could change if the gov- ernment goes ahead with a sovereign issue (see below). There are also indications that a few inter-dealer brokers in London may betrying to develop closer links with Islamic firms in the Gulf, possibly by establishing re- gional offices there.
Takaful
Takaful markets in other countries are con- siderably more mature than in the UK. These include the Gulf States and particularly Ma- laysia, which has been active in this area for several decades. The prospects for growth in the UK are unclear; but it is possible that as products are rolled out in these more estab- lished markets, there may be some transfer of activity to the UK. The growth of Takaful products in the UK could help to develop the Islamic mortgage market. As with con- ventional firms, Islamic finance firms would then be able to offer a combined package to
46 GlobalIslamic Finance June 2010
prospective home buyers. One of the biggest obstacles for Takaful providers is the limited amount of Shariacompliant reinsurance ca- pacity.
Precise data is unavailable but, based on anecdotal evidence, Islamic reinsurance is able to provide only a fraction of the cover needed by the Taka- ful industry. As a re- sult, Takaful provid- ers sometimes have to obtain dispensa- tion from their SSBs to take cover with conventional rein- surers. As already mentioned, the FSA is willing to consider further applications from firms in this sector on the same basis as convention- al firms.
Complex prod- ucts
Although derivative products are well established tools for managing risks in conventional fi- nancial markets, there has been con- siderable difficulty developing Shari- acompliant products which mirror these instruments. These products are contro- versial and have not been readily accepted by scholars because of their speculative na- ture. A small number of products have been developed by various banks, for example, Citi have products for managing currency and interest rate risk and other firms such as Deutsche Bank have developed a tech- nique for Islamic derivative products.
Indicative of the widening interest in this area, the International Swap and Derivatives Association (ISDA) and the International Is- lamic Finance Market (IIFM) have signed a Memorandum of Understanding (MoU) to develop a master agreement for Shariacom-
pliant derivative products. It is difficult to as- sess exactly what type of instruments may result but the FSA is following this closely.
Hedge funds
Several hedge fund managers have Sharia- compliant funds within their portfolios. In
January 2007, Amiri Capital was authorised as a stand alone Islamic hedge fund man- ager and more applications may be in pros- pect. The growth will to a great extent de- pend on whether the investors approve the methods proposed by fund managers. As with the UK managers of conventional hedge funds, managers of Islamic funds would also be regulated by the FSA. As now, the main regulatory focus would be on systems and controls, valuations, disclosure and conflicts of interest. So far as we know, there are cur- rently no major regulatory issues with regard to Islamic hedge fund managers.
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