A ‘sterling’ year for UK Islamic fi nance: 2017 in review

What a year it has been for Islamic fi nance in the UK. From the ever-growing retail banking sector to the booming fi ntech arena, from the sustained interest in real estate investment to continued developments in the regulatory space, the pace is picking up and the atmosphere of positivity is palpable. Join us as we take a whirlwind tour through the past 12 months, explore the prospects for the year ahead, and talk to some of the UK’s top practitioners about their achievements in the Islamic fi nance space. UK Islamic Finance launched with a bang in August 2017, bringing with it a renewed commitment from the UK government to focus on supporting and developing the country’s Islamic fi nance proposition. “The UK can play a unique role as a neutral partner in bringing together market participants from around the world with a stake in developing Islamic fi nance and Shariah compliant products,” confi rmed Minister of State for the Foreign and Commonwealth Offi ce Mark Field. “The government remains committed to provide a level-playing fi eld for Islamic fi nance.” So what developments have we seen since then? The big news was of course the exclusive announcement by Stephen Barclay, Economic Secretary to the Treasury, that HM Treasury will

return to the sovereign Sukuk market in 2019 with a reissuance of its 2014 £200 million (USD) inaugural issuance. Announced at the highly
successful IFN Europe event held in London on the 11th September, the move is a clear signal of the government’s commitment to promoting
Islamic fi nance worldwide and supporting the growth and development of its own Shariah compliant institutions. “We want to see the UK play a greater role in raising Islamic capital,” said Barclay. “It’s the government’s role to provide a long-term policy and regulatory environment that allows and encourages Islamic fi nance markets to both innovate and create new fi nancial tools.” Regulatory support As part of this commitment, the Bank of England continues to work on a Shariah compliant liquidity facility as part of its strategy to broaden liquidity provision to the market, with a launch expected in Spring 2018. “We hope that the facility, once up and running, will provide Islamic banks in the UK with greater fl exibility in meeting their liquidity requirements under the Basel III rules. In this respect, the facility will help to level

the playing fi eld between Islamic banks and their conventional counterparts,” said Arshadur Rahman, a manager and Islamic finance specialist at the Bank of England.

UK-based institutions off ering Islamic fi nancial services have approximately £3.34 billion of assets under management

In August the All-Party Parliamentary Group for Islamic Finance (APPGIF) was re-constituted and has reaffi rmed strong cross-party support both for the development of Islamic fi nance within the UK, and the promotion of UK interests and expertise abroad. The group plans
to focus on the introduction of Shariah compliant student loans, following the tabling by Lord Sharkey in March 2017 of an amendment to the Higher Education and Research Bill seeking to introduce formal reporting measures in relation to the introduction of Shariah compliant
student fi nance. Other targets include the delivery of Shariah compliant start-up loans for businesses, and opportunities to develop Shariah compliant loans for exports — particularly given the current Brexit negotiations, which could spur new conversations with trade partners outside the EU. With its fi rst stakeholder meeting held in November, further developments are to be expected in the new year.

Export fi nance
Speaking of export loans, UK Export Finance (UKEF, the UK’s export credit agency and a ministerial department of the UK government) introduced two major developments in the past year that could have a very real impact on encouraging participation into Islamic fi nance
projects overseas. The fi rst step was to increase UKEF’s ability to support business in overseas markets, and the agency now has the capacity to double its existing exposure — up to £5 billion in some markets. The second was a landmark new local currency initiative, which brings
UKEF guarantee currencies to over 40. This allows overseas fi rms to raise funds in local currency but still buy British — something that

UKEF is hoping will generate more interest from Islamic countries in UK governmentguaranteed transactions. “We are one of the very few export credit agencies willing to look at Shariah compliant structures,” said Gordon Welsh, the head of the business group at UKEF. Further Sukuk following the landmark UKEF-backed Emirates issuance of 2015 could also be on the cards. “Banks today are less interested in long-term assets on their balance sheet, so the traditional links between banks and export credit agency guarantees is weakening. This means we are now looking towards the capital markets for additional sources of liquidity — and Sukuk [is] an obvious choice,” said Welsh.

Exchange ambitions
The London Stock Exchange (LSE) is also doing its bit to support and develop Islamic fi nance. “London is renowned for being the world’s most international fi nancial centre, providing a nexus of expertise across fi nancial, professional and support services. In particular, when it comes to Islamic fi nance, the UK is ranked as the leading Western centre in terms of its overall off ering. To validate this, UK-based institutions off ering Islamic fi nancial services have approximately US$4.5 billion (£3.34 billion) of assets under management,” said LSE CEO Nikhil Rathi.
LSE has a strong Islamic issuance track record, with over US$49 billion (£36.4 billion) raised through 66 Sukuk issues to date. The group has also developed highly liquid and transparent electronic fixedincome order books that allow for both primary and secondary access and trading
to international investors, and in 2015, LSE launched a dedicated Sukuk segment on its Fixed Income markets to facilitate liquidity. In 2017 the bourse saw the listing of Islamic Development Bank (IDB)’s Sukuk bond, a fi ve-year dated Sukuk that raised US$1.25 billion (£928.7 million) in April, and a second more recent fi ve-year Sukuk from IDB issued on the 20th September, which raised US$1.25 billion. “The next step in the
development of Islamic fi nance in Europe would be European corporates issuing Islamic finance instruments. At LSE, we have made this easier
with our exchange-regulated International Securities Market, which streamlines the admittance and listing process for Sukuk instruments,
and makes it easier for Sukuk issuers to dual-list in London and get all the benefi ts of a London listing,” said Rathi.

Court appeal

One of the biggest stories in the global Islamic fi nance industry this year was of course the Dana Gas debacle, with the UAE-based gas company announcing in June 2017 that it had received legal advice that its Sukuk Al Mudarabah, issued in 2007, and restructured in 2013, was not
Shariah compliant and was therefore unlawful under UAE law. The company proposed to exchange the Sukuk with a new instrument on inferior terms, and started legal proceedings in the UK and UAE to protect its interest against actions by the Sukukholders. Although the scandal created shockwaves throughout the industry, it also cemented the UK’s position as a leading global provider of security, stability and legal justice. While we still await the outcome of the UAE court case, which is scheduled to start in December, the English High Court ruled on 17th November that the purchase undertaking attached to the Sukuk was valid and enforceable under English law — prompting cries of relief from Sukuk investors around the world. “The ruling by the English court is credit positive for the Islamic fi nance industry because it adds certainty around the legal enforceability of the Sukuk,” explained Henry MacNevin, associate managing director of banking EMEA at Moody’s
Investors Service, speaking to UK Islamic Finance.

Commercial success

But it is not all about top-down support. The UK has a thriving Islamic fi nance industry with a deep pool of highly experienced practitioners all working to build up the space, and this year has seen some exceptional performances and impressive levels of activity. In particular, the real estate sector continues to thrive, with Islamic overseas investors demonstrating sustained interest despite Brexit, attracted by the stable environment and currency benefi ts. Stephen Barclay UK-based institutions off ering Islamic financial services have approximately £3.34 billion of assets under management 90 North is one of the most prominent players in the sector, and managing director and co-founder Philip Churchill described his year. “As well as establishing our new offi ce in Sydney, I’m immensely proud of the volume of acquisitions and sales 90 North has conducted during 2017. As we enter the fi nal weeks of 2017, 90 North has acquired and sold, or has under contract or exclusivity, US$1 billion (£748 million) of real estate across the US, UK, Europe and Australia,” he told UK Islamic Finance. “90 North’s Academy Investment Programme of UK student housing is developing real momentum, with our latest acquisition being The Union, a 187-unit student accommodation development in Royal Leamington Spa, while further investments are under exclusivity.” Rosette Merchant Bank is another strong player, and in August this year the bank acquired a portfolio of fi ve UK M&S stores on behalf of a leading Qatari institution for a consideration in excess of £50 million. In October, the bank followed this up with another major acquisition: the purchase of the Debenhams department store in Swansea, Wales, for £15 million. “Rosette was particularly active in H2 2017, closing c.£80 million (transactional volume) of Shariah compliant real estate products with another £50 million of commercial real estate put under off er. Overall this was a strong second half for Rosette and has led to increased investor demand for our income producing real estate products,” said CEO Sam Broadhead. “Rosette is currently working on another real estate structured product which is due to close in January 2018 and we have a healthy pipeline of real estate assets coupled with strong investor demand for H1 2018.

Concurrently, Rosette is working on the development of alternative asset classes, including technology-based products which we feel will complement our core real estate off ering to our Islamic investor base.” Other deals came from Mayfair-based Greenridge Investment Management, Manchester’s Broadoak Real Estate Finance, and from leading Bahraini investment manager Investcorp – which in October
announced the completion of its debut European real estate portfolio with the acquisition of seven UK assets for a total purchase price of over
£40 million, bringing its total UK portfolio to over US$105 million (£79.7 million). The fi rm launched its European strategy earlier this year with a UK Industrial and Logistics portfolio, which made its fi rst acquisitions in the UK in June of this year in partnership with Citivale, a UK
property development and asset manager based in York.

Retail growth

On the retail side, momentum continues to build and the UK’s retail Islamic banks are going from strength to strength. We saw a change of leadership in several banks, including the appointment of Charles Haresnape as CEO of Gatehouse Bank, heralding a change in direction for the bank. “Gatehouse Bank is developing its strategy to include home fi nance (HPP) and Buy to Let fi nance in addition to its current business lines of commercial real estate fi nance, commercial real estate investment advisory and deposit taking,” Haresnape told UK Islamic Finance. “We have increased our executives to bring in new skills, developed a new customer service centre in Milton Keynes and commissioned brand new, state of the art technologies. We are now attracting both UK resident and off shore customers. We remain committed to wholly Shariah compliant and ethical products.” Other news in 2017 came from Al Rayan Bank, which became the fi rst standalone UK Islamic bank to achieve a credit rating from Moody’s Investors Service. “Moody’s has assigned fi rst time ratings, including a ‘baa2’ baseline credit assessment (BCA), an ‘a2’ adjusted BCA and ‘Aa3/Prime-1’ deposit ratings, to Al Rayan Bank,” confi rmed MacNevin. The bank plans to use the credit rating to go after wholesale banking business in the UK as well as to compete with conventional banks. In November UK Islamic Finance was also able to announce that Al Rayan Bank planned to issue Sukuk in 2018. “We are considering a Sukuk issuance,” confi rmed Al Rayan treasurer Amir Firdaus in an interview. “If we choose to do it, it would be an asset-backed Sukuk and I believe it would be the fi rst Islamic issuance by a bank in Western Europe. The structure would also be a fi rst in the Islamic fi nance world.”

Deals aplenty

A Sukuk from Al Rayan would be a landmark step for the UK’s domestic Islamic debt market. However, UK firms already have a wide range of experience in Shariah compliant deals, and 2017 saw UK expertise spread around the world and across multiple transactions in various jurisdictions. In 2017, law fi rm K&L Gates worked on multiple deals including a US$310 million (£231.9 million) Ijarah fi nancing of an A380 aircraft leased to a Middle East airline, a US$125 million (£93.5 million) Islamic facility to an Asian airline secured against ticket revenue, a US$50 million (£37.4 million) collateralised Murabahah facility with a Dubai bank, and a US$2 billion (£1.49 million) Shariah compliant investment management structure for a Saudi health insurer. Foot Anstey acted for Greenridge
Investment Management on two signifi cant acquisitions with structured Islamic fi nancing, including the £35 million acquisition of a mixed use property in Sheffi eld primarily let to the Secretary of State for Transport, Local Government and the Regions. Led by partner Imam Qazi,
the fi rm also developed a new diminishing Musharakah-based property fi nancing product for Gatehouse Bank, acted for fi ntech fi rm Liberis on the development of an innovate Shariah compliant corporate fi nance product for SMEs, and acted for a Malaysian sovereign investment fund on the acquisition and Islamic fi nancing of real estate in London as well as a joint venture agreement connected with an internationally renowned university. Farmida Bi, a partner at Norton Rose Fulbright, worked on the US$2.5 billion (£1.8 billion) sovereign Sukuk and

Eurobond from Pakistan. The fi rm also helped to develop the Islamic window for QNB UK, assisted on the Albaraka Turk US$200 million (£149.6 million) Sukuk in Turkey, advised HSBC Middle East on several commodity Murabahahs for Turkish entities, and advised on multiple property deals for ABC International Bank in the UK. Shakeel Adli, a partner and head of Islamic fi nance at CMS, advised on numerous
Shariah compliant transactions including real estate fi nancings in England and Scotland, the establishment of a fund domiciled in the Cayman Islands and trade fi nance in Africa. Khaliji Islamic, a Shariah compliant investment and advisory boutique, also worked on multiple deals including advice for a European asset manager on a US$150 million (£112.2 million) Shariah compliant Gordon Welsh note backed by aviation leases, an Asian December 2017 4 www. u k i s l a m i c f i n a n c e. com COVER STORY Georgia Hanias fi nancial institution on setting up a structure to issue a series of Shariah compliant structured notes, a major European investment bank on the distribution of its Shariah compliant structured notes, a UK-based manufacturing company on acquisitions, operations and disposals, and structuring and fundraising for a fi ntech firm in the GCC and for a manufacturing firm in Pakistan. Khaliji also helped clients to raise or place in excess of US$150 million (£112.2 million) in Treasury placements, and advised on GCC-based real estate transactions in excess of US$100 million (£74.8 million).

Fintech focus

These are just a few of the wide variety of fi rms based in the UK and supporting Shariah compliant transactions worldwide.
But there is even more to the UK market than professional services expertise. One of the biggest trends of the moment is fi ntech, and as a world leader in the space this is an area where the UK has the potential to make a real mark on the Islamic fi nance industry. In 2017 the parent publication of UK Islamic Finance, Islamic Finance News (IFN), partnered with UK-based industry body Innovate Finance to pioneer a
groundbreaking initiative paving the way for insightful analysis of the Islamic fintech sector through concrete intelligence. The IFN Islamic Fintech Landscape is an international initiative that aims to identify and track all fintech firms catering to the Islamic market across the globe. Notably, in the inaugural results published in September 2017, the UK made it into the top fi ve countries in the world for Islamic fintech with 16 fi rms currently in operation – second only to Malaysia, which had 18. One of these fi rms is Ummah Finance, the UK’s fi rst online Islamic bank. Another is Yielders, which in April 2017 became the fi rst FCA-regulated and Shariah certified Islamic fi ntech platform in the UK. “At
Yielders we have continued to provide market beating returns for our investors to reap the rewards of real estate investment from as little as £100,” said chief operations offi cer and co-founder Zeeshan Uppal. “Yielders have made critical platform updates, allowing us to further develop the platform and cope with an ever increasing customer base.” Other developments came from Edale Group, which in 2017 launched
a fractional Sukuk platform designed to open up the Islamic debt capital market to retail investors. The Shariah compliant investment specialist is now working with Islamic fi nancial institutions to help their affl uent clients across international markets access Sukuk directly by white-labelling its technology platform, BondSmart. “Our main achievement was the fractional Sukuk platform mandate from a Middle East bank. We are now working on a fractional operating process for their client advisers. 2018 should see deployment of this and work with other banks I anticipate given current conversations,” said director Lawrie Chandler. “Fintech is getting a lot of exposure as fi nancial service businesses
look at what they can do overseas under whatever framework comes from Brexit.”

One of the biggest trends of the moment is fi ntech, and as a world leader in the space this is an area where the UK has the potential to make a real mark on the Islamic finance industry

Faizal Karbani, CEO & Founder of Simply Ethical, also recently launched a new entity that will trade as InsureHalal, based in the UK and FCA regulated. “Our business model is to provide Shariah compliant insurance products in the retail and SME space, and we are expecting to launch our fi rst product, Home & Landlord insurance, very soon,” he told UK Islamic Finance. “It will be the first such product in the UK.” Innovate Finance is instrumental in supporting Islamic fi ntech in the UK, and has seen a hugely successful year itself: including its global summit at Guildhall in April, which also hosted its fi rst ever fintech start-up competition, Pitch360. The group also collaborated with strategic partners including Hogan Lovells, Magisters Advisors, Pinsents Masons and Deloitte on reports that focused on topics such as investment, open banking and fi ntech hubs, and worked closely with its members to publish a blueprint for an industry-led ‘Virtual Sandbox for Financial Innovation’. In partnership with EY and commissioned by HM Treasury, Innovate Finance also published the UK’s fi rst Fintech Census, which showed an industry that’s not only robust, but confi dent. “Out of almost 250 fi ntech companies surveyed, half of respondents said they were extremely positive about their revenue streams, and were expecting global revenue growth of over 100% in the next 12 months,” Georgia Hanias, the head of global communications at Innovate, told UK Islamic Finance. HM Treasury will host its second International Fintech Conference in London on the 22nd March 2018, highlighting the UK’s standout fi ntech innovators as well as up-and-coming Fintech fi rms from around the world.

International outlook

Finally, we also saw sustained support this year from the UK’s industry associations and professional groups — not least from TheCityUK, the industry-led body representing the UK’s fi nancial and professional services. “TheCityUK has had a busy year of domestic and international engagement,” reported senior advisor Wayne Evans. “As well as working with our Whitehall partners, the City of London Corporation and the Lord Mayor we have worked with and on behalf of our members with Russia, Kazakhstan, Kyrgyzstan, Saudi Arabia and Turkey. Through TheCityUK our members have met a number of inward delegations. Our Malaysia bilateral dialogue fi nished in the Spring and we have started a new programme with Brunei; with meetings with the deputy fi nance minister and various offi cials from his ministry and the central bank. Stella Cox, the managing director of DDCAP and also the chair of our Islamic Finance Group, led a delegation on behalf of TheCityUK to Brunei to follow up on initial discussions in London. Following the launch of TheCityUK’s 2017 Islamic Finance Report, we were asked by the Bank of England to arrange a meeting with members for a delegation led by the Central Bank of Pakistan. The Polish Embassy also asked us to brief visiting Ministry of Foreign Aff airs Offi cials. Both meetings focused on the UK’s leading role as an Islamic fi nance hub.”

Exciting times

The above provides just a brief snapshot of the extraordinary growth and exceptional activity that have characterized the UK’s Islamic fi nance industry this year. It is of course by no means an exhaustive summary and there are many, many more deals, companies, events, funds, and people out there that are contributing to the industry’s ongoing development. However, it clearly demonstrates the excitement and positivity that surrounds the sector, and the enthusiasm with which its stakeholders are driving forward future progress.