Islamic banking primed for UK market growth

Islamic finance firms based in the UK look set for growth over the next five years, according to a new report. 

In note to clients, rating agency Moody’s said operators in the British market offering Islamic finance have been establishing themselves as niche players in wealth management and retail banking over the last several decades.

"With the UK emerging as a Western hub for Islamic finance, UK-based lenders will benefit from increased international demand for Shari'ah-compliant banking, while the Islamic FinTech sector will likely drive further growth," said Arif Bekiroglu, Senior Analyst at Moody's. 

"Regulations are broadly supportive, as illustrated by the harmonisation of the tax treatment of conventional and Shari'ah-compliant products."

Of course, while the sector's growth prospects appear favourable, its prohibition of interest payments prevents it from using a range of conventional funding and liquidity sources, inflating its funding costs relative to mainstream UK lenders. The Bank of England is said to be working on potential solutions.

At present, there are five Shari'ah-compliant UK regulated banks, while four Middle Eastern lenders provide Islamic banking services via their UK branches. 

These banking operations focus mainly on wealth management and retail banking, including mortgage lending. 

According to Moody’s, wholesale Islamic banking services, including sukuk issuance, are dominated by two investment banks. The UK Islamic finance sector also includes 19 Fintechs active in areas ranging from student finance to peer-to-peer lending.