UK’s Islamic banking assets rise 26% to $8.2 billion in 2023: Fitch Ratings
Islamic banking assets in the UK experienced a significant surge of 26% in 2023, reaching a total of $8.2 billion, according to a recent report by Fitch Ratings. This substantial growth underscores the UK’s status as a key Western hub for Shariah-compliant banking.
Fitch projects that the UK’s Islamic finance sector will expand further, with assets expected to reach $15 billion in the medium term, up from $10 billion at the end of 2023. The report attributes this growth to the conversion of conventional banks to Islamic banking, ongoing asset expansion in Islamic financial institutions, and favourable regulatory conditions.
The London Stock Exchange (LSE) has emerged as a major player in the global Islamic finance landscape, now ranking as the third-largest listing venue for US dollar Sukuk. The LSE holds a 35% share of the global US dollar Sukuk market, with $80 billion in Sukuk outstanding as of mid-2023.
Sukuk, known as Islamic bonds, are Shariah-compliant financial instruments that grant investors partial ownership of the issuer’s assets until maturity. This economic structure is a fundamental element of Islamic finance, which gained prominence as a more secure alternative following the 2008 global financial crisis. London has since established itself as a leading centre for Shariah-compliant finance in the West, alongside other key locations such as Luxembourg, the US, and Ireland.
“English Law governs the majority of dollar Sukuk and Islamic syndications worldwide,” Fitch noted in its report. “UK banks play a crucial role as Sukuk arrangers and are significant participants in Islamic interbank and derivatives markets.”
Fitch also highlighted the role of the London Metals Exchange, which is utilized by Islamic banks globally to facilitate cash financing through tawarruq contracts. Tawarruq, in Islamic finance, involves purchasing goods on credit and then selling them at a lower price to generate liquidity, rather than taking possession of the goods.
The report emphasized the steady growth of Islamic finance in the UK, pointing out that the country currently hosts four Islamic banks, all owned by members of the Gulf Cooperation Council (GCC). A fifth Islamic bank is anticipated to be established soon, potentially increasing competition and further diversifying the sector.
“The conversion of Ahli United Bank to an Islamic bank, following its acquisition by Kuwait Finance House in 2023, is expected to be finalized in 2024,” Fitch reported.
However, Fitch cautioned that the domestic Islamic finance sector in the UK remains relatively small. Despite its long-standing presence and supportive regulatory environment, Islamic banks held only 0.1% of the UK’s total banking assets at the close of 2023.
“Demand drivers are limited, given that Muslims make up just 6.5% of the UK’s population,” the report stated. It also highlighted the challenges of limited awareness of Islamic finance and varying degrees of Shariah compliance among consumers.
Looking forward, the UK government plans to launch a Shariah-compliant alternative student finance product after 2025, which could enhance financial inclusion in the country.
Nevertheless, Fitch noted that UK-based Islamic funds face strong competition from well-established Western markets like Luxembourg, Ireland, the US, and Jersey, which continue to challenge the UK’s ambitions to become a dominant force in the Islamic finance industry.
