The Bank of England (BoE)’s decision to create a liquidity alternative for Islamic finance is a “huge vote of confidence” for Islamic banking in the Western world.
Peter Trebelev, co-founder of Islamic digital bank Rizq, says the development creates “much needed support for Islamic banks in the UK”.
Trebelev says Islamic finance in the UK currently faces several challenges. These include availability of sufficient Islamic banks and liquidity.
“This initiative from BoE will provide the much-required support for the aspiring Islamic digital banks like Rizq to get access to the Shariah compliant liquidity finance.”
The BoE revealed its new alternative liquidity facility (ALF). The new facility isn’t based on interest – forbidden in Sharia law – and is backed by a fund of compliant assets.
It works like wakalah, an Islamic banking term which means agency contract. Depositors will see the return on this fund passed back to them, in lieu of interest.
Peter Horton, CEO of Al Rayan Bank, says his bank has “long called” for the establishment of an ALF.
“In addition to helping to ensure that UK banks are better placed to meet the needs of all consumers, regardless of faith, this will also help to position the UK as a leading hub for global Islamic finance.”
Trebelev agrees that the UK is a hub for Islamic banking and financial services. “We are seeing a number of fintech start-ups in this space, who are providing a range of financial services.”
Islamic finance globally held assets of $2.4 trillion in 2019, according to the Islamic Financial Services Industry Stability Report.
Islamic finance in the UK
The four incumbent UK Islamic banks hold some £5 billion in assets. And some 12 high street banks currently offer Sharia-compliant banking services.
In the UK, Islam is the second largest religion. Muslims make up 5% of England’s population – more than 2.5 million, according to census data.
Hassan Daher, CEO and founder of Islamic fintech Qardus, says “the breadth and depth of UK capital markets” makes it a hub in terms of sukuk listings.
Yet Daher believes that while the UK remains attractive from an asset and wealth management perspective, more needs to be done for the Islamic banking and insurance sectors.
“Most of the regulations are currently aimed at Islamic banks,” he says. “It would be great if the regulators can also take a similar approach in order to promote the Islamic fintech sector.”
Trevelev says regulatory support for Islamic banks and fintechs is “essential”.
He adds that for Islamic fintechs to flourish, regulators should support new entrants to help them meet requirements.
From the fintech’s perspective, Trebelev says continuous cooperation can enhance customer confidence in the sector.