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Bank of England’s Islamic finance facility is hitting the mark

The UK provides the most comprehensive variety of investment options of any Western market

Bank of England Reuters
A pedestrian walks past the Bank of England HQ. The Bank's Alternative Liquidity Facility allows institutions that cannot receive interest to place deposits

The Bank of England’s Alternative Liquidity Facility is the first ever non-interest-based deposit facility offered by a Western central bank.

Launched in December 2021, this game-changing mechanism is intended to give parity to Islamic banks by granting financial institutions that cannot pay or receive interest for religious reasons the ability to place funds at the Bank of England – as conventional banks do.

Ultimately, of course, this helps Islamic banks better manage their regulatory liquidity. This, in turn, contributes to making more funding available for investment opportunities by those participants.  

Under the ALF model, participant deposits are backed by a fund of sharia-compliant securities known as sukuk. The return from these instruments is then paid to depositors instead of interest.

In the first instance, the fund purchased sukuk that was issued by the Islamic Development Bank. 

The growth of Islamic investment

When the ALF was launched, the Bank of England’s then head of sterling markets Rhys Phillips said the facility would “further strengthen the United Kingdom’s role as the leading international financial centre for Islamic finance outside the Muslim world”.

Today, the global sharia finance sector is worth more than £3 trillion.

Not only that, but four of the world’s 10 fastest-growing economies are Muslim-majority countries. The UAE’s economy, for instance, grew by 7.6 percent in 2022, and according to its finance minister Sheikh Mohammed bin Rashid, is aiming to double in size by 2030.

It is clear, then, that the Islamic world offers lucrative inbound investment opportunities for the markets set up to attract it. 

The 2022 Bank of London and the Middle East (BLME) research report, Built to Last, noted that, before the ALF’s introduction, the UK already had more Islamic banks and lenders than any other Western country.

For practising Muslims, the UK therefore provides the most comprehensive variety of investment options of any Western market – and the ALF looks likely to help the country’s sharia finance sector grow even more.

UK opportunities

This creates opportunities for the UK to attract capital from the Islamic world. BLME’s Strong Foundations report predicts that Gulf investment in British real estate will reach £2.5 billion in 2024.

Given that around 85 percent of all citizens from the GCC countries are Muslim, it’s clear that the UK’s leading sharia finance sector provides a strong advantage in attracting their investment. 

The Bank of England’s second annual report on the ALF points to widening participation in the facility, suggesting that the UK’s Islamic finance sector is set to further strengthen. As of February 28 2023, there was £140 million deposited into the facility. 

While the ALF is still in its infancy, the Bank of England report shows it has had a very successful initial 18 months.

As BLME and other sharia-compliant banks continue to grow, the Bank of England’s support through initiatives such as the ALF will demonstrate its commitment to levelling the playing field in this important market for Islamic finance.    

Mark Lynch is head of treasury at Bank of London and the Middle East