Regardless of the shocking referendum result, there are reasons for optimism about the UK’s role as a hub for Islamic finance in a post-Brexit environment. Sohail Jaffer explains.
While many of the economic consequences of Brexit will take months – or even years – to become visible, some are already apparent. Three weeks after the shocking referendum result, it was reported that the UK’s property market was especially susceptible to a large-scale exodus from the City of London, with companies in the financial services sector already looking to relocate staff to competing EU centres such as Dublin, Luxembourg and Frankfurt. According to one survey, some 26 million square feet of office space in London is now at risk from companies moving abroad if rules allowing free trade are revoked.1
More broadly, some forecasters have projected that as many as 37,000 jobs in the City of London could be lost as a direct result of the UK’s referendum. Immediately after the shock poll, one recruitment consultant was quoted by GlobalCapital as saying “for anyone in a financial services job, this will make Lehman look like a village fête.”2
Doubts about Passporting
It is believed that especially at risk following the Brexit vote are those companies that have depended on so-called “passporting” rules allowing banks, insurers and asset managers to market their products throughout the EU from a London base. The investment management industry in the UK manages some £5.5 trillion of assets and employs around 35,000 people.3 Some of these funds and jobs could migrate to competing centres such as Luxembourg and Dublin, both of which have lost no time in making overtures to asset management groups based in London. This has led some commentators to forecast “carnage” for the UK’s asset management industry.4
Much of this concern appears to be premature, given that the terms of Britain’s exit have yet to be negotiated. Indeed, because the referendum is technically advisory rather than legally binding, it is not even absolutely certain that Parliament will approve an exit from the EU, although most economists and analysts are assigning a 90%-plus likelihood that Brexit will mean Brexit.
Even in what appears to be a worst-case scenario, in which Britain is excluded from the single European market, the impact on the asset management industry need not be as apocalyptic as some have suggested. In the market for alternative investment funds (AIF), for example, the European Securities and Markets Authority (ESMA) has recently advised that passporting rights enjoyed by managers of AIFs in EU countries should be extended to those in several non-EU member states, replacing the previous system of country-by-country private placement authorisation. As Portfolio Adviser commented in July, “Esma’s advice only concerns funds regulated under the AIFMD. It doesn’t concern Ucits funds. However, the regulator’s stance implies it is theoretically possible to extend passporting rights to jurisdictions outside the European Economic Area. That in itself must give the Brexiteers some hope they could secure fund passporting rights for Ucits funds after leaving the European single market.”5
Investment Opportunities Unlocked by Brexit
A number of other recent indications will encourage those who argue that projections of disaster for the UK’s financial services sector following the EU referendum have been grossly over-exaggerated. Most obviously, the fall in sterling turbocharged the performance immediately after the referendum of the FTSE-100, which is heavily populated by exporters.
Beyond the public equity market, 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. More generally, international companies have been quick to identify cut-price opportunities created by a weaker UK currency. Witness, for example, the purchase by AMC Entertainment of Odeon & UCI Cinemas for £921 million, or the announcement by Japan’s Softbank of its £24.3 billion acquisition of ARM Holdings.
There are other less quantifiable reasons why London remains upbeat about its prospects as a financial services sector even in a post-Brexit environment. Writing in the Wall Street Journal in early July, policy chairman at the City of London Corporation Mark Boleat reiterated the view that fears of London’s imminent demise were overcooked. “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,” he insisted.6 This echoes a more general view that London’s history, time zone, legal system, language and quality of life will all combine to ensure that it retains its key asset, which is its highly professional, motivated and innovative cosmopolitan workforce. This in turn will ensure that irrespective of the red carpets that cities like Paris say they will be rolling out for bankers relocating from the UK, London will remain a focal point for deal-making.
London may also benefit from proposed tax reductions that the government may introduce given that the Brexit vote has forced it to abandon its target of achieving a budget surplus by 2020. Companies contemplating relocating may think twice if the government delivers on the promise of former Chancellor George Osborne to cut corporation tax from the current level of 20% to below 15%.
London’s Ambitions in Islamic Finance
London has made no secret of its ambition to position itself as the leading hub for Islamic finance outside Malaysia and the GCC. The UK’s importance as a centre for Shariah-compliant finance dates back to the early 1990s, when the first Islamic mortgages were made available to house-buyers in Britain. Today, there are six fully-fledged Islamic banks in the UK, and a total of 20 lenders offer Islamic financial products and services, more than any other Western country. Additionally, as the Gulf Times noted shortly before the UK’s referendum, “Middle Eastern banks have a particularly big exposure to the UK Islamic finance industry through their subsidiaries there, namely Qatar Islamic Bank, Abu Dhabi Islamic Bank, Mashreq (UAE) and ABC International Bank (Bahrain). The Bank of London and The Middle East, the largest Islamic bank by balance sheet, profit and breadth of service in the West, sees itself as a “bridge” between Europe and the entire Mena (Middle East and North Africa) region.”7
Speaking to the World Islamic Economic Forum in 2013, former Prime Minister David Cameron said that he wanted London to “stand alongside Dubai as one of the great capitals of Islamic finance anywhere in the world.”8 This rhetoric has been backed up by action. As the City of London Corporation confidently asserted in a report published in November 2013,9 “the UK has become the leading western centre for Islamic finance, developing Shariah-compliant financial services such as Islamic mortgages and sukuk. The UK is now Europe’s premier centre for Islamic finance.”
The following year, London threw down its gauntlet in the Islamic finance market when it became the first government outside the Muslim-majority world to issue a sovereign sukuk. Since then, London has continued to attract a number of sukuk listings, with the London Stock Exchange reporting that 57 sukuk issuers have raised over $51 billion on the Main Market and the Professional Securities Market.10
Some have argued that London’s pre-eminence as a centre for Islamic finance has been threatened by the recent EU referendum. Reporting on the Brexit vote at the end of June, Gulf Times commented that Luxembourg was “set to take over London’s Islamic finance hub in Britain”.11 This comment that “looking for alternatives for Islamic investors in Europe, Luxembourg comes quickly to mind. It has shown readiness for innovation over the past years, not only by developing Islamic finance services, but also by inviting financial technology businesses to bring new products and services to the market.”
This may be. But the success that other European markets may be enjoying in the Islamic finance market is a trend that was evolving long before the UK called its referendum: Luxembourg, for example, had been highly successful in attracting sukuk listings, while banks like Kuveyt Turk were exploring the potential of retail banking services in Germany.
Little Impact on Retail-targeted Islamic Financial Services
In a number of other areas of Islamic finance, bankers believe that it will be a case of business as usual following the EU referendum. Retail-targeted Islamic banks, for example will remain largely unaffected, because their focus is almost entirely on the UK market. The UK-listed asset manager Rasmala, which operates several Sharia-compliant funds, has downplayed the possible effects on the Islamic finance sector of the decision to leave the EU.12
More broadly, a recent briefing published by the law firm, K&L Gates,13 notes that “for those who seek to engage with Islamic Finance and attract Islamic-compliant investment to the UK, there are opportunities in the upheaval.” This note points out that Islamic Finance has never been governed by EU law in the UK or elsewhere, adding that “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.”
There are also cultural, social and educational ties that may play a role in sustaining the continued growth of a vibrant and innovative financial services industry in the UK, which are applicable to Islamic finance. Over 60 institutions in the UK offer Islamic finance courses while 22 universities offer degree programmes specialising in Shariah-compliant finance.14 It remains to be seen whether Brexit will weaken or strengthen the UK’s pre-eminence as an educational centre for the financial services industry in general and for Islamic finance in particular.
Another reason for optimism about the UK’s role as a hub for Islamic finance in a post-Brexit environment is the strength of its commercial links with non-EU countries in Asia, Africa and elsewhere with robust growth prospects in Shariah-compliant finance. As the Alternative Investment Managers Association (AIMA) commented soon after the referendum, 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.”15
One area where London has clearly strengthened its bona fides as a financial centre servicing borrowers, lenders and investors from beyond the EU over the last 12-18 months is in green financing and socially responsible investment (SRI). This is in turn likely to strengthen its credentials as a hub for Shariah-compliant finance, given the growing recognition of the common ground shared by the SRI and Islamic finance movements.
Conclusion: Glass Half Full?
While few conclusions about Britain’s economic future outside the EU will be drawn until Article 50 is invoked, kick-starting negotiations between the UK and Brussels, it is probably too early to start writing obituaries for London’s role as a hub for Islamic finance.
About the Author
Sohail Jaffer is a Partner and Head of International Business Development for “private label” bancassurance with the FWU group based in Dubai. FWU is an international financial services group focusing on innovative and customised product design in the field of unit-linked investments and family Takaful savings plans for a number of emerging markets. Mr. Jaffer has successfully originated, negotiated and won several major bancassurance deals in the GCC region, Pakistan and Malaysia.
He has written extensively on alternative investments and has edited several Euromoney publications on hedge funds, multi-manager strategies and investing in the MENA region, as well as six books in the Euromoney Islamic finance series including Retail Banking, Asset Management, Takaful, Wealth Management, Investment Banking, Sukuk, and a CPI publication on investing in the GCC markets.
Mr. Jaffer is a speaker at international industry events, a participant member in the Gulf Bond and Sukuk Association, and is currently leading the activities of the Alternative Investment Management Association (AIMA) in the Middle East.
1. Sunday Telegraph, July 17 2016
2. GlobalCapital, June 24 2016
3. Financial Times, July 3 2016
4. City AM, June 29 2016
6. Wall Street Journal, July 5 2016
7. Gulf Times, June 21 2016
8. www.thenational.ae July 7 2016
9. “An Indispensable Industry – Financial Institutions in the UK”, City of London Corporation, November 2013
11. Gulf Times, June 28 2016
12. The National, ibid
15. www.aima.org – Brexit – The Implications of the UK’s Exit from the EU