How London became the Islamic finance capital of the West

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London has in recent years cemented its position as a vital hub for Islamic finance thanks to history, circumstance and a concerted effort by the government to support the sector.

With its strong financial infrastructure and burgeoning fintech space, the UK capital is primed to dominate Western Islamic finance for the foreseeable future.

“London and the UK play a significant role in the international side of Islamic finance,” said Bashar Al-Natoor, global head of Islamic finance at Fitch Ratings.

“The UK capital continues to be a key listings hub for sukuk (Sharia-compliant bonds) internationally, and the London Stock Exchange specifically has been housing a lot of international sukuk issuance – they have clearly dominated that.”

But London’s success rides on more than listings alone. According to Al-Natoor, the fact that English is spoken as a second language in the majority of countries where Islamic finance is popular is part of London’s attraction.

“More important, and more technical, is the English law,” he said. “In most international sukuk transactions and syndications, English law is cited in these agreements.”

Islamic finance ecosystem

London’s ecosystem comprises law firms, bankers, advisors, managers and arrangers all familiar with Islamic finance.

This is why other contenders, most notably Luxembourg and Ireland, are facing difficulties when attempting to dethrone the English capital.

According to Al-Natoor, there is also strong political will in the UK to maintain London’s status as a hub for Islamic finance.

This is best illustrated by the sovereign sukuk issuances seen in the past decade: the first in 2014 worth £200 million ($260 million), and the second in March 2021, worth £500 million.

While these figures are dwarfed by the nearly £195 billion in bonds the UK government issued in 2021-22, they demonstrate to foreign investors, especially those based in the Gulf, that London is “open and able” to carry out sukuk issuance.

Stella Cox, managing director of London-based Islamic finance intermediary firm DDCAP Group, noted that another sukuk issuance is “a distinct possibility,” but stopped short of offering a timeframe. 

Fintech boom

Cox added that an increase in the number of Islamic fintech firms based in London has also played a role in maintaining the city’s leading position, despite the sub-sector still being in its relative infancy.

“Last year and this [year], we have seen a sizeable uplift in the number of successful early-stage funding rounds for UK Sharia sector businesses, as well as in the total amount of capital raised for or by them,” Cox said.

“That included investment by VCs previously operating outside the Sharia-compliant sector, and capital from investors in overseas markets, including core markets within the GCC and Southeast Asia.”

Further confirming the UK’s dominant position in Islamic finance, Kuwait’s Boubyan Bank last year launched the world’s first digital Islamic bank, NOMO, based in London. The move followed Boubyan’s successful acquisition of its long-time associate Bank of London and the Middle East. 

NOMO offers Sharia-compliant wealth management and banking services to customers worldwide from the UK. Boasting access to “banking beyond borders,” Boubyan cited the UK’s ability to provide an established and credible base for cross-border expansion through the existence of requisite, domestic financial infrastructure.

This, explained Cox, was complemented by strong regulatory and legal credentials that support and validate emerging firms’ ability to move to new markets overseas.

Investment haven

Mujtaba Khalid, head of the Centre for Islamic Finance at the Bahrain Institute of Banking and Finance, said current geopolitical tensions and skyrocketing commodity prices could prove an unexpected boon for the industry and UK–GCC co-operation.

“Most of the jurisdictions where Islamic banking has a strong foothold are economically highly tied to commodities. Given the fact that we are again entering into an era of extremely high commodity prices – fuelled by supply chain issues due to the coronavirus pandemic and the Russia-Ukraine war – there is reason to believe that Islamic banking and finance will receive a positive spillover.”

He added: “Many Islamic finance institutions in the GCC and beyond will have excessive liquidity with limited avenues to invest. This is where they could look at financing projects in the UK through a Sharia-compliant way, as has been done many times in the past.”