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Islamic Economic Studies
Vol. 22, No. 1, May, 2014 (37-78) DOI No. 10.12816/0004130
Islamic Finance in the United Kingdom:

Factors Behind its Development and Growth
AHMED BELOUAFI
ABDELKADER CHACHI
Abstract
This paper aims at capturing the latest developments and growth of Islamic
finance (IF) in the UK. The study also aims at shedding light on the driving
factors that have been attributed to the rise of this phenomenon in this country.
To meet these objectives, the paper utilizes historical and thematic analytical
methodologies to draw some lessons and recommendations. The results show
that the UK is the country number one in the West, in view of the number of
institutions and Universities involved in the educational and training aspects
relating to IF, the number of licensed intermediaries providing Islamic
financial services, and the number of law firms involved in legal and
consultancy services in the IF field. Among the prime factors that have been
explored to explain the gradual, but steady progress of IF in the country, are:
(i) The UKs government proactive role, and (ii) - The active role played by
a number of UK Muslim organizations.
Keywords: Islamic finance, banking, finance, FSA, UK

JEL Classification: G00, G200, G29
KAU-IEI Classification: I0, F11.
Associate Professorof Islamic Economics and Finance, Islamic Economics Institute, King Abdul Aziz
University, Jeddah, Saudi Arabia. E-mail: ambelouafi@kau.edu.sa
Economist Researcher and Senior Training Specialist, Islamic Research and Training Institute,
Islamic Development Bank, Jeddah, Saudi Arabia. E-mail: achachi@isdb.org

37
38 Islamic Economic Studies Vol. 22, No.1
1. Introduction
Despite the economic and financial downturns that have engulfed many
international economic and financial centers, the latest reports reveal the fact that IF
still exhibits a two-digit growth over the past few years. For Instance, the Malaysian-
based KFH Research Ltd reported, in September of this year that the industry is
operating across 75 jurisdictions with 600 institutions, and total assets to be in the
threshold of US$ 2 Trillion by the end of the year; representing more than a 20%
increase from last years figure (KFH Research, 2013 and IFSB Stability Report,
2013). As a result of this growth and spread, IF is no longer confined to its traditional
Muslim and Arab markets; rather, it has spread, in various degrees, all over the globe.
Among the places that have witnessed a unique involvement and evolution in this
process is the United Kingdom. The active role, that the UK has played, led some
experts to describe this phenomenon as a standalone experiment in the
development and promotion of IF outside the Muslim and Arab worlds.
Seizing upon this momentum, the British Prime Minister; David Cameron
announced at the 9th World Islamic Economic Forum1 (9th WIEF) that he and his
government plan to make the UK an International Financial Centre for IF. This paper
argues that the UK is already a hub in many aspects relating to IF operations and
practices; the UK has been involved in accommodating limited services as early as
the late 1970s and early the 1980s, the number of institutions providing Islamic
financial services, the number of various degrees and certificates offered by British
Universities and other professional institutions, and, finally, the number of law firms
engaged in consultancy and IF product developments. Therefore, what matters is
putting this call into the perspective of the previous initiatives taken by the Labour
government, financial regulators and supervisors, promoting agencies; like the
CityUK and its predecessor IFSL, of the competitiveness of the City of London as
an International Financial Centre on one hand, and elaborating on the factors that
stand behind this growth and development on the other.
1 The 9th WIEF was convened in London on October 29th-31st 2013. The Forum started as an OIC
Business platform in 2003. In conjunction with the tenth OIC Summit that was held on 15th October
2003 in Putrajaya, Malaysia, the establishment of the Forum was declared. The inaugural OIC Business
Forum sought to create a business face of the OIC. The Forum brought together government leaders,
captains of industries, academic scholars, regional experts, professionals and corporate managers to
discuss opportunities for business partnerships in the Muslim world. The second OIC Business Forum
was convened in Kuala Lumpur in 2004 and the subsequent convening of the 1st WIEF in Kuala
Lumpur in 2005. This was an important shift that opened up the Forum to include Muslim communities
beyond OIC countries and other non-Muslim communities across the globe. Source: www.wief.org.
Belouafi & Chachi: Islamic Finance in the United Kingdom 39
By making this pledge, the current UK government is, in fact, reinforcing the
previous initiatives taken by its Labour predecessor that will make London at the
heart, of not only a regional level but an international bid to compete with Islamic
Cities such as Bahrain, Dubai and Kuala Lumpur. In the words of the UK Chancellor
of the Exchequer, George Osborne, is to turn the City of London into the unrivalled
western Centre for Islamic Finance Osborne (2013). This ambitious plan by a
conservative government emphasizes the fact when it comes to economic interests
of the nation, the divide line between Labour and Conservative parties is slim; British
governments aim to consolidate the position of London as an International financial
Centre. We think this is an understandable move that may reflect a response, by
British governments, to the realities of the fierce head-to-head economic and
financial battles that are ever increasing within the Capitalist camp since the collapse
of the Berlin Wall in 1989, and they have been reinforced by the economic and
financial uncertainties that many advanced economies are going through because of
inflictions of the recent financial turbulences. George Osborne, the British Finance
Minister, summarizes this policy in a crystal clear manner in the article that he wrote
on the FT newspaper as follows: Whether it is attracting money from China,
rejecting damaging protectionism and financial transaction taxes, or issuing the first
sovereign Islamic bond in the western world this government is doing what it takes
to open Britain up for business, and for new sources of finance and extra jobs
Osborne (2013).
Indeed, there are other dimensions like political and educational ones as noted by
a recent note by the Foreign and Commonwealth Office (FCO) and by the UK trade
and investment (UKTI) report. The latter document revealed that UK is one of the
most attractive places to study in the world with about 100,000 international students
studying at UK universities, Quilter-Pinner and Yan (2013) and UKTI (2013: 11)
To put this call and the measures that may follow into perspective, this research
aims to capture the latest developments of IF industry in Britain. Particular attention,
in this regards, is given to the identification of the major factors that have played an
important role in this evolution. The investigation also sets out to draw important
lessons and extrapolates practical steps that can be of benefit to regulatory and
supervisory authorities in other jurisdictions intending to integrate IF into their
conventional financial systems. To address these points properly, the research
explores the following questions:
1. What are the earliest and latest developments of IF industry operations in the
UK?
2. What are the deriving factors that stand behind the uniqueness of the role
played by the UK in the spread and development of IF outside the Arab and
Muslim World?
3. Is there a correlation between the development of IF in the UK and the
welcoming attitude adopted by the UK authorities? In other words, does the
Financial Services Authority2 (FSA)s approach to regulating Islamic finance
provide the appropriate environment for its development in the UK? 3
4. What lessons and practical steps can be drawn from the experiment?
The remainder of the paper is organized as follows: section 2 reviews the relevant
literature. Section 3 provides a brief overview of the developments of the operations
of IF in general. Section 4, on the other hand gives particular attention to the earliest
and latest developments of IF industry in the UK. Section 5 touches upon the factors
that stand behind the development and growth of IF in the UK, while Section 6 looks
at the phases of the regulatory process pursued in the UK to provide a level playing
field for IF products and services and explores the practical steps derived from the
UK experiment and the lessons that can be learnt from the experience. Finally,
Section 7 draws some concluding remarks and identifies some issues for future
consideration as far as the accommodation of IF in conventional systems is
concerned.
Before ending this introduction, we must stress that describing this newly
emerging industry in this research as Islamic should never be interpreted as an
Islamic authentication or stamping from our part; it is simply that is how IF
products and services have been described in many official reports and other studies
and researches. Stating this matter clearly and categorically from the beginning is
very important. This is because of three main reasons: i) Limits of the research (i.e.
raising this issue is beyond the stated objectives of the study), ii) - We are not
Shar ah scholars or members of advisory boards whose main job is to give Shar ah
verdicts or fat w on the conducted operations and products; and finally iii) We
have spelled out some of the reservations that have been raised by us and others
regarding the Islamicity of the prevailing Shar ah compliant industry in our 2011
publication.
2 UKs single financial regulatory body. It came into being in 1997, and it operates under a single piece
of legislation that applies to all financial operations and products: the Financial Services and Markets
Act 2000. Financial Services Authority, 2006, Islamic Banking in the UK, Briefing Note BN016/06,
9 March 2006. Available at: www.fsa.gov.uk/pages/About/Media/notes/bn016.shtml.
3 Masood O. et al., 2009, Role of Islamic Mortgages in UK, p. 377.
2. Review of the Literature
Numerous studies and researches have been carried out in the last few years,
dealing with different aspects related to the presence of IF in the UK. The reviewed
literature seems to indicate that the challenges facing IF in the UK and the
opportunities that it may benefit from received a great deal of attention.
Wilson (1999) investigated the characteristics of the British financial market and
the evolution of Islamic finance since the beginning of the 1980s until the 1990s of
the last century. He examined the challenges and opportunities surrounding the
development of IF in Europe with particular reference to the UK experiment.
However, the data of the study stopped at the borders of the 1990s of the last century.
Wilson (2003), Langah (2008) and Belouafi et al. (2011) also investigated the
barriers and opportunities facing the presence of Islamic banking and finance in the
UK. Aldohni, (2008) on the other hand, focused on the UK prudential banking
regulation in paving the way to the Islamic banking operations by investigating the
issue of how effective has been the UK regulatory body; the FSA in achieving its
objectives through the adopted measures?. Aldohni (2011) has taken the issue
further by comparing the approach taken by the UK authorities and that of their
Malaysian counterpart in accommodating IF in their respective financial markets.
Other investigations like Dar (2002), Mathews et al. (2003) and Masood et al.
(2009) explored the Islamic mortgage products and market in the UK for buying
houses in Britain. They dealt with a partial issue relating to financing homes for
members of the Muslim community in the UK; the size of this market and the
obstacles that encounter the members of the community in purchasing their own
homes.
Wilson (2007) looked at the latest developments about "Islamic finance in

Europe", with references to the experiences of some countries such as Germany
regarding the issuance of instruments (i.e. Saxony-Anhalt uk k), and the United
Kingdom with respect to licensing of Islamic banks and traditional financial services
that are compatible with the provisions of the Islamic Shar ah. The study focused
on the British government for the issuance of sovereign uk k and the factors that
made Britain ahead of their European counterparts in this area.
At the official level, the UK government published two important documents in

2007 and 2008. The 2007 study published by the FSA concentrated on the regulatory
perspective. The other official document issued by the UK Treasury in December
2008, spotted a number of barriers that may prevent the development of Islamic
finance in the British capital market and the role that the British government has and
should play in this regard, in order to create a level playing field for this type of
funding and institutions.
Another study by Masood et al. (2011) provided an analysis of the growth and
rise of smaller Islamic Banks in the past decade. The main focus of the research has
been investigating the stability of smaller IBs vis--vis their larger sisters. The study
was general not confined to the UK as such.
Khan (2012) analysed the perception and awareness of non-Muslims towards

Islamic finance in the United Kingdom and the selection criteria used by the
consumers in choosing a financial institution. He determined the extent to which
non-Muslims are aware of Islamic finance in the UK and their perceptions towards
it. He explained the behavioural aspects of consumers towards the financial services
industry, which helps in forming perceptions or beliefs. He also discussed the
intrinsic as well as the extrinsic factors that affect non-Muslims perceptions towards
Islamic finance in the UK.
Elaine Housby wrote two books on Islamic finance in the UK. One in 2011
entitled Islamic Financial Services in the United Kingdom and the other in 2013
entitled: Islamic and Ethical Finance in the United Kingdom. In the first book, the
author provided a comprehensive account of the Islamic financial services that are
available in the United Kingdom at the time, giving a general account of the British
Muslim population, its size, age, origin, location, educational and occupational
achievements, followed by an overview on the history of Islamic finance in the UK
and an outline on the essential principles of Islamic thought on financial matters.
Subsequently she dealt, in turn, with each area of financial services as they exist at
the time in the UK, including personal accounts, home purchase finance, the
equivalents of personal loans and insurance, investment, uk k and commercial
funding. In the second book, Housby answered questions such as what exactly is
ethical finance? Is Islamic finance ethical? Is ethical finance Islamic? by examining
a wide range of financial institutions in the UK, which fall broadly within the ethical
sector, considering the nature of their principles and practices, and how they relate
to Islamic models and to Muslim communities. She compared the principles and
functioning of Islamic and secular ethical financial services in the UK and provided
a comparison of Christian thought and secular ethical financial services with the
Islamic tradition.
A more recent brochure published by the UK Trade & Investment (UKTI, 2013),
provides an overview of the Islamic finance landscape in the UK, mapping the
sectors history, its phenomenal rise and outlining the unrivalled knowledge
expertise and experience the UK offers across all sectors from education to
international law and banking Business profiles from key industry players.
To the best of our knowledge, none of the previous studies and researches has
examined separately and thoroughly the factors that stand behind the development
and growth of IF in the UK; particularly the initiatives taken by the Muslim
community living over there. Furthermore, our study covers the trend of this
phenomenon in a detailed and comprehensive manner with more focus on the
regulatory approach followed by the UK financial regulators to derive some practical
steps, lessons and limitations that can be drawn from this experiment.
3. Development of Islamic Finance: An Overview
Islamic financial operations were known and practiced since the 7th century AD
when the Prophet Mohammed (peace be upon him) prohibited some transactions
involving Rib (interest), Gharar (deception), Qim r (gambling), Mujazafah
(speculation), Ihtikar (monopoly) and other similar transactions and allowed some
other transactions such as Mur ba ah (Mark-up sale), Mush rakah (partnership),
Mu rabah (sleeping partnership), Muz ra ah (Sharecropping) and similar
transactions. Some of these operations were known to many earlier civilizations but
they were developed further under the Islamic civilization, (Chachi, 2005).
The Global Islamic assets held by commercial banks stood at $1.3bn in 2011, but
the industry's forecast growth of some 40% over two years will see this figure rise
to $1.8bn in 2013, according to research by Ernst & Young (Handckok, 2013).
The industry is set to grow significantly in the years ahead. At the current rate of
growth the market could top $2 trillion in assets by the end of 2014. The largest
centres remain concentrated in Malaysia and the Middle East, including Iran, Saudi
Arabia, UAE and Kuwait (UKIFS, 2013).
The prevailing IF came into being no more than four decades ago. However,
historically speaking, the first recent writings and attempts to establish a modern
Islamic bank that cater for the financial needs of Muslims in a Shar ah compliant
way, were made much earlier.
Most of the writings on the history of contemporary Islamic finance agree that
the idea of Islamic banking emerged in the late 1940s of the twentieth century,
referring to the book of Anwar Iqbal Qureshi (1946) entitled: Islam and the Theory
of Interest, and an article by Naeem Siddiqui (1948) entitled "Banking on Islamic
Principles". However, an earlier attempt, that has come to be known only recently4,
was made in the late 1920s in Algeria, when an Algerian reformist named Brahim
Abu-Yaqddan5 called for the establishment of a modern bank based on the
principles of Islamic Shar ah. That call was, then, followed by a detailed study
prepared by some Algerian businessmen. In that study all the necessary steps to open
the bank was spelled out, but the experiment never came to realization as it was
prevented by the French colonizers who were in control of Algeria at that time6.
The recent institutional development of Islamic banking since the 1940s went
through three major phases.
The first phase is between the 1940s and the 1950s when many of the Islamic
countries became independent from the Western colonization. This phase saw few
attempts to initiate Islamic finance, among which an attempt to establish an Islamic
bank in the late 1950s in a rural area in Pakistan, though this had no lasting impact
(see Traute, 1983; Wilson, 1983 and Chachi, 2005). It was a small experimental
Interest-Free Bank, founded by a small number of pious landowners who were
prepared to deposit funds without interest rewards. The credit was advanced to other
poorer landowners for agricultural improvements. No interest was charged for the
credit, but a small fixed administrative fee was levied to cover the operating costs of
the bank. However, as Wilson (1983:75) put it: although there was no shortage of
borrowers, the depositors tended to view their payments in the institution as a once
and for all effort and the institution soon ran short of funds. In addition, the
depositors took a considerable interest in how their deposits were loaned out and the
bank officials enjoyed little autonomy with no new deposits forthcoming, and
problems over recruitment of bank staff, who were unwilling to give up lucrative
and secure careers in city commercial banking for an uncertain venture in the
countryside, the institution soon foundered.
This was followed by a two successful attempts in the second phase during the
1960s. One was the introduction of a local saving bank in the rural area of Mit-Ghamr
4 Belabes, (2013). A New Pages from the History of Islamic Banking: An Early Initiative to Establish
an Islamic Bank in Algeria in the Late 1920s.
5 Abou Al-Yaqdhan, Ibrahim (1928) Hjat al-Jazar ila Masrif Ahli (The Need of Algeria for a Native
Bank), Wadi Mizab.

6 Belabes, (2013). Op. cit, p. 10-11.
in Egypt, the Mit-Ghamr Local Saving Bank (MGLSB) and the other was the
establishment of the Pilgrims Fund Corporation or Tabung Haji in Malaysia (THM).
Both were based on the principles of Islamic Shar ah.
The MGLSB was initiated by Al-Naggar, who later became the Secretary General
of International Association of Islamic Banks. The model was in line with the
German savings banks adapted to the rural environment of an Islamic developing
country. This experiment proved quite successful and the savings mobilisation
impressive. Its success in winning the support of a large number of students, farmers
and villagers who regarded the bank as their own, is discussed by Ready (1967); El-
Naggar (1974), Harvey (1981); Traute (1983) and Wilson (1983). El-Naggar
(1974:272) commented: "In spite of the short period during which the bank has been
in operation, it has rendered vital services to the economic development of the local
community, especially in the development and the establishment of small industries
and in providing new opportunities of work for unemployed workers in Mit-Ghamr
and its 53 affiliated villages.
After three and a half years, the experiment came to an end, not because of its
insolvency or other financial difficulties or misconduct, but, rather, because of its
success as measured by some indicators pointed out in some studies (Ready,1967;
El-Naggar, 1978; Wilson, 1983 and Chachi, 2005). During the period of its
operation, the bank was able to reduce problems of rural indebtedness in the areas
where this bank and its branches were operating. Borrowers, no longer, had to
depend neither on the few local moneylenders, many of whom charged high interest
rates, nor on the non-Islamic banks which consider them as a non-bankable class
and which, they themselves would not deal with, as these banks base their operations
on Rib (interest and usury) which is Haram (prohibited) according to their belief in
Islam (El-Naggar, 1978; Wilson, 1983; Chachi, 2005).
El-Naggar (1978:230-232) reported that: Paradoxically, yet not surprisingly, it

has been its success, rather than the reverse, which has created problems for the bank.
As soon as the social role of the bank began to make itself evident in the successful
development of the local area, conflicts started with the local social authorities who
saw it as interfering in their own area of authority and regarded it as simply
reduplicating their own efforts unnecessarily. In the meantime, because the bank
introduced a new concept of banking more expressive of Islamic belief and practice
and firmly rooted in a popular Muslim base, the size of savings and the number of
savers were increasing rapidly either by the addition of new savers, or by savers who
transferred their money from the commercial banks to the Islamic one. Inevitably,
this aroused the traditional banks against their new popular based and progressive
competitor. Thus, in furthering such changes, the functions and role of the bank
could, from a narrow view-point, be regarded as conflicting with existing institutions
such as the social authorities, the commercial banks and some of the central holding
organizations: industrial or commercial which were mainly under government
control, so it was stopped.
Nevertheless, the venture laid the seeds of modern Islamic banking and pointed
the way for subsequent undertakings. Soon afterwards, many Islamic social,
developmental and commercial banks started doing business following the example
of Mit-Ghamr local savings bank with some improvements. The first of such banks
is the Nasser Social Bank established in 1971 in Egypt, not as profit oriented
institution but as a social bank to serve the previously unbankable low income
group; followed by the Islamic Development Bank (IDB), an Inter-governmental
institution established in 1975 in Jeddah (Saudi Arabia), with the purpose to foster
the economic and social development of its member countries, and by the Dubai
Islamic Bank (DIB) in Dubai (UAE) in 1975, the first major Islamic commercial
bank, the success of which led to the establishment of a series of such banks
elsewhere.
The second successful experiment in this regard, happened approximately at the

same time as Mit-Ghamr Local Savings Bank. It is the birth of the Pilgrims Fund
Corporation or Tabung Haji in Malaysia (THM), which started operation in 1963
with a number of objectives that included:
Enabling Malay Muslims to save gradually, in order to support their

expenditure during Hajj (pilgrimage) and for other beneficial purposes.
Enabling Malay Muslims to have active and effective participations in
investment activities that are permissible in Islam through their savings.
Protecting and safeguarding the interests and ensuring the welfare of pilgrims
during pilgrimage by providing various facilities and services.
With such objectives in mind, Tabung Haji, which is still operating until now,
has been running successfully since then. Over the last 50 years of operation, it has
provided excellent and comprehensive services with premium quality to satisfy the
pilgrims need prior, during and after their pilgrimage. Its existence was attributed to
a working paper presented by the Royal Professor Ungku Aziz titled, Plan to
Improve the Economy of Prospective Pilgrims in 1959 (Tabung Haji website).
Tabung Haji started its business in 1963 with only 1281 members and a total
deposits of MR46,600 the quasi-government body now has a membership (account
holders) of around 8 million and deposits of more than US$41 billion. It is the
country's largest Islamic fund manager with a network of 119 branches with more
than 6,000 touch-points nationwide. It also makes its presence globally by operating
an office in Jeddah, Saudi Arabia. The number of account holders when seen in
proportion to the total Malaysian Muslim population of 29 million, is an indicator
(27.6%) of how popular and successful this experiment is in Malaysia (Tabung Haji
website).
The third phase happened by the mid-1970s, which saw the introduction of
commercial private banking, Dubai Islamic Bank (DIB) and an intra-government
initiative, the Islamic Development Bank, at a regional level among OIC 7 member
countries in 1975. From then on, IF has grown steadily, spreading from one
institution in one country, the Dubai Islamic Bank in the UAE, to about 600
institutions in more than seventy Islamic and non-Islamic countries with total assets
in the threshold of 2 Trillion US Dollars as mentioned earlier (KFH Research, 2013
and IFSB Stability Report, 2013) and it has been growing at the rate of two digits
over the last fifteen years8. Thus the operations and products of the industry have
also been diversified.
4. The Developments of IF industry in the UK
4.1. The Earliest Developments up to the year 1999
The UK welcomed Islamic banking and finance since its early emergence in the
late 1970s and early 1980s. The following activities, undertaking and actions make
the point:
In 1976, soon after the First International Conference on Islamic Economics,

organized by King Abdul Aziz University, Jeddah at Makkah Al-
Mukarramah, Saudi Arabia, the Islamic Foundation9, Leicester, UK
established its Islamic Economic Unit as the first ever research Centre on the
subject. This Research Centre was followed by the International Centre for
7 Organization of Islamic Conference. Recently the name of the organisation has change to the
Organization of Islamic Cooperation.
8 According to Ibrahim Warde, the rate of growth [of IF] accelerated from an average of 14 percent
a year in 1994-2002 to 26 percent a year in 2003-2010. Ibrahim Warde, 2010, Islamic Finance and
the Global Meltdown, available at: www.islamica-me.com.
9 Winner of the Islamic Economics prize of the Islamic Development Bank group in 1432H (2011).
Research in Islamic Economics (CRIE) at the University of King Abdul Aziz

University in 1977. The Islamic Foundation UK subsequently published the
major works by pioneers of Islamic economics, banking and finance like
Nejattullah Siddiqi, Umer Chapra, and others. It also organized conferences,
seminars and workshops on these topics in collaboration with the IDB, IRTI
and Loughborough University.
In 1981, the International Association for Islamic Economics (IAIE) was
established in Leicester, UK. It is the Association responsible for the
organization of the major international conferences on Islamic Economics.
The 4th Conference was organized in Loughborough, UK in the year 2000.
The last 2 conferences (8th and 9th) were organized in Qatar in 2011 and in
Turkey in 2013 respectively.
In 1982, the UK allowed Dar Al-Mal-Al-Islami (DMI), based in Geneva, to
open an office in London and to mobilize investment funds for Luxembourg
Investment Company and Luxembourg Tak ful Company. DMI was founded
in 1981 by indenture under the laws of the Commonwealth of the Bahamas
with its headquarters in Geneva (Switzerland) for the purpose of conducting
business affairs in conformity with Islamic law, principles and traditions and
offering a wide range of Islamic financial services. It has an extensive network
stretching over four continents, with well-integrated regional subsidiaries
enabling it to respond to local business needs and conditions. Based on this
geographic structure, the DMI Group and associates act as a financial bridge
between the worlds leading financial Centres and Islamic countries (DMI
website).
In 1983, Tak ful UK Limited was established in the UK as a subsidiary of
DMI, to cater for the need of Muslims residing in the UK, offering them
Islamic investment opportunities provided by Tak ful S.A in Luxembourg,
especially for those who are opposed to buying a product they consider is
contaminated with Rib or interest. Tak ful (UK) is still operating from
Birmingham, UK, offering Islamic financial services available from a broad
spectrum of product providers, in addition to Tak ful services offered by
Tak ful S.A in Luxembourg (Tak ful, UK Website).
In 1983, The Bank of England (BOE) allowed Al-Baraka Bank to operate in
the UK. This bank was founded in 1982 by the Al-Baraka Investment
Company, based in Jeddah, Saudi Arabia. It was the only bank offering
exclusively Islamic Banking Services in the UK under the 1987 Banking Act.
Its business did not take-off until it opened two branches in London in 1988
and 1989, and a branch in Birmingham in 1991. Al-Barakas major initiative
was in housing finance, as it started to provide long-term Islamic mortgages
to its clients from 1988 onward. Al-Baraka and its client would sign a contract
to purchase the house or flat jointly, the ownership share being determined by
the financial contribution of each of the parties. Al-Baraka would expect a
fixed predetermined profit for the period of the mortgage, the client making
either monthly or quarterly repayments over a 10 to 20 year period, which
covered the advance plus the profit share (Wilson, 1999:426-428). The BOE
allowed Al-Baraka some time to seek diversification of ownership, but the
problem could not be solved to its satisfaction. The bank therefore decided to
surrender its license to offer banking services. It finally closed as a bank at the
end of June 1993, though it continued to operate as an investment company
(Housby, 2013).
In 1995, the Loughborough University became the first western university to
recognize and adopt the teaching of Islamic banking and finance at the Master
level in collaboration with the Islamic Foundation UK, which sponsored the
research-fellow to do the teaching and supervision of students choosing the
optional course in their Master degree.
In the same year, the Islamic Foundation UK, together with Loughborough
University organized a major Conference in collaboration with the Islamic
Development Bank, where the Governors of some central banks of Muslim
countries such as Malaysia and UAE met with the Governor of Bank of
England, Sir Eddie George and some scholars to discuss the possibility of
allowing Islamic banks to operate in the UK to serve its Muslim population.
In 1997, the United Bank of Kuwait added another major development in the
availability of Islamic financial products in the United Kingdom. This was the
introduction of home purchase finance by the bank by establishing a specialist
Islamic division to its UK operation in 1991. This was eventually named the
Islamic Investment Banking Unit, the name under which it still operates. The
United Bank of Kuwait later merged with the Al-Ahli Bank and is now known
as the Al-Ahli United Bank. The house purchase product was given the brand
name of Manzil, which means dwelling. The introduction of this service
released considerable pent-up demand. Initially, Manzil offered only a
Mur ba ah product, but in 1999, it introduced an Ij rah mortgage version.
The latter has proved to be far more popular (Housby, 2013).
4.2. The Latest Developments from 2000 onward
It appears, from the available sources that from the year 2000 onward, the UK
realized further the benefits of Islamic finance, so it allowed it gradually on the high
street. For instance:
In 2000, one of the famous UK Universities10 hosted the 4th International

Conference of Islamic Economics. Thus, making the only European country
to hold such an important event at the international level. In addition, in the
year 2002, one of its academics11, was awarded the Islamic Development Bank
Prize in Islamic Banking and Finance. In the same year 2000, the Islamic
Foundation UK established the first Islamic institute12 to teach Islamic
economics, banking and finance at master level in collaboration with
Portsmouth University, then with Loughborough University and nowadays
with Gloucester University (MIHE website and Islamic Foundation Website).
The year 2001 saw a remarkable political and regulatory boost through the
creation a high-level working group with representatives from the City,
government, the council of Mortgage Lenders, the Muslim community and the
FSA, to examine the barriers to Islamic finance in the UK, (Ainley et al., 2007:
8; HM Treasury, 2008: 10; UKIFS, 2013:10). The group was set up by the
Bank of England and the UK Treasury, and it was chaired by Andrew Buxton,
former Chairman of Barclays Bank, and Sir Eddie George, the then governor
of the Bank of England (BOE). Since the formation of this working group, as
reported by the UKIFS (2013:10), the UK government and regulators have
attempted, through the addition of Alternative Finance clauses to various
Taxation Acts, to create an environment where IF players and their clients are
not treated any differently to their conventional counterparties. The account
below elaborates further on the steps taken in this regards.
In 2003, the UK, recognizing the vast potential of this market, began shaping
the tax and regulatory framework and it allowed the development of Islamic
finance products. One of the first initiatives was to remove the double stamp-
duty land-tax charge on Islamic mortgages. Hence, the UK is the first EU
country to introduce legislative changes to provide a level playing field for
IF in its tax bills. The establishment since 2003 of an enabling fiscal and
regulatory framework in the UK for IF has been key to facilitating these policy
objectives. Initiatives have included:
The removal of double-tax on Islamic mortgages and the extension of tax
relief on Islamic mortgages to companies, as well as individuals.
10 The University of Loughborough, UK

11 John Presley, ex-Professor of Banking at Loughborough University, UK.
12 Markfield Institute of Higher Education, UK.
Reform of arrangements for issues of bonds so that returns and income

payments can be treated as if interest. This makes London a more
attractive location for issuing and trading uk k.
Initiatives by the Financial Conduct Authority to ensure that regulatory
treatment of Islamic finance is consistent with its statutory objectives and
principles.
In 2003, the Government also launched the UKs first IF Task Force in order
to support further developments of the UKs Islamic finance sector, help
increase inward investment and strengthen the economy. It included major
industry figures to ensure that the UKs offer is promoted at home and abroad
by both the public and private sector. One of the key objectives of the Task
Force is to engage with the UK Islamic Finance Secretariat (UKIFS) and
others to promote and raise the international profile of the industry. Many
firms operating in Islamic finance in the UK are members of UK Islamic
Finance Secretariat (UKIFS), which is part of The CityUK (UKIFS, 2013).
In July the same year 2003, HSBC, the giant international bank, introduced an
Islamic current account and Islamic home purchase finance in the United
Kingdom. The banks Islamic division is called Am nah, meaning trust.
HSBC has at least one branch in virtually every town of a reasonable size in
the United Kingdom, and is thus an everyday presence to British Muslims.
Specialist Am nah counters were set up in branches with a significant Muslim
population locally and prominent posters displayed in the windows of such
branches. HSBC originally offered an Ij rah contract, but has now switched
to a Mush rakah Mutanaqissah (diminishing partnership) scheme. In this
latter model, the bank and the client are joint-owners of the property, with the
client buying out the banks share of the equity in installments and paying rent
for the use of the proportion of the property still owned by the bank. The main
difference from an Ij rah model is that the client is described as a joint-owner
from the outset rather than as a tenant until all payments have been completed.
Since the year 2005, London has also emerged as the Centre for secondary
market trading in Islamic instruments. The City is home to many of the
originating banks, as well as the hedge funds and real money investors that
have recently bought into Islamic bonds ( uk k). uk k are structured in such
a way that investors have a beneficial interest in the cash flows generated by
the underlying assets. The size of the uk k market, encompassing domestic
and international issues, is estimated at about $60bn. The market is expanding
at a rapid pace. The past few years have seen a rapid expansion in the issuance
of uk k securities across Asia and the Middle East (The Banker, 11-2007).
In this regards, the UK is also ahead of many Western and non-Western
financial Centers. According to the Global IF Forum (GIFF, 2012:9) report at

the end 2012, the London Stock Exchange listed 42 uk ks, followed by
Luxemburg and the Irish Stock Exchanges listing 16 and 9 uk ks
respectively.
In its Budget 2009 report, the UK Treasury announced provision of relief from
tax on capital gains and capital allowance rules to encourage Islamic debt
issuance in the form of uk ks, all as part of its ongoing drive to promote the
UK as a Centre for Islamic finance.
The UK government in January 2010 took a further step with regards to the
issuance of uk k in order to provide greater certainty to issuers, arrangers
and investors, and to provide AFIBs with a regulatory treatment akin to that
for conventional bonds where they are structured to have economic
characteristics similar to conventional debt instruments (Finney and Sapte,
2009).
In 2013 the 9th Meeting of the World Islamic Economic Forum was hosted in
London. This is the first time this major international conference has been held
outside Asia and the Middle East. In this meeting, the UK Prime Minister,
David Cameron, announced the UK plan not only to maintain the position of
London as a hub of Islamic finance and also announced that the British
Government will soon issue 200 million worth of uk k. This figure is well
below the 2 billion worth of uk k that was planned for, during the height of
the international financial crisis in 2007 (Jessop and Bell 2009: 10).
Nowadays, the UK is, as reported by Filippo et al. (2013:29) and UKIFS
(2013:5), one of the most advanced and sophisticated Islamic financial
markets in the western world and is quickly becoming a key destination for
foreign Shar ah-compliant institutions. It is the first western country to allow
the establishment of the first fully-fledged Islamic bank, the Islamic Bank of
Britain (IBB) and currently has six fully-fledged operating Islamic banks, that
is more than in any other Western country. The fully-fledged Shar ah
compliant banks in the UK are given in the following table:
Table-1
Summary about Islamic Banks Operating in the UK
Name of Inception Nature of Work and Activities

Institution Date
The Islamic Bank 2004 A retail bank and the only Islamic bank with a high street
of Britain (IBB) presence having five branches and around 50,000 customers.
The bank offers a wide range of Sharia compliant financial
products in the UK.
European Islamic 2005 A wholesale investment bank which offers its customers
Investment Bank Shar ah compliant Treasury and capital markets, asset
(EIIB) management, private banking, trade finance, correspondent
banking and advisory and corporate finance services. EIIB has
its headquarters in London.
The Bank of 2007 An independent wholesale Shar ah compliant UK bank based
London and The in London. Its offering spans corporate banking, treasury and
Middle East wealth management that comprises private banking and asset
(BLME) management.
Qatar Islamic 2008 A Wholesale Islamic Investment Bank. It provides Shar ah
Bank UK (QIB compliant investment banking services including trade finance,
UK) (European private equity and asset management to clients ranging from
Finance Hose) High Net Worth individuals to sovereign wealth funds and other
institutional investors.
Gatehouse Bank 2008 A wholesale investment bank operating in capital markets, real
estate, asset finance, Treasury business and Shar ah advisory
services. The bank manages $1.7bn real estate assets in the US
and UK. In December 2012 the bank issued the UKs first ever
real estate backed sterling uk k Al-ljarah.
Abu Dhabi 2013 Also a wholesale bank which is already operating a large branch
Islamic Bank UK network in Egypt and is in the process of extending operations
(ADIB-UK) to several markets across the Middle East and beyond. ADIB
UK limited was established to bring the banks services to
clients in the UK.
Source: Authors Compilation from Institutions Web Sites & UKIFS (2013:12)
This is in addition to the provision of Shar ah compliant accounts by an estimated

16 conventional banks, such as HSBC, Lloyds-TSB, Barclays Bank, etc. that have
set up windows in the UK to provide Islamic financial services.
The UK is also a major global provider of the specialist legal expertise required
for Islamic finance, with around 25 major law firms providing legal services in this
area. London, in particular, has become an important financial Centre, where major
international firms and the Middle Easts biggest traditional banks are offering
Islamic financial products and services in this city (Filippo et al., 2013:29). Today,
the UK is the leading Western country and Europes premier Centre for Islamic
finance. It is well positioned to capture a growing share of Islamic finance business
in the coming years (UKIFS, 2013). According to The Banker magazines latest
Islamic Finance survey, the UK ranks as the ninth largest global location for
managing Islamic finance assets, with $19bn in reported assets (The Banker, 2012).
Finally it is important to make a note about how IF is being perceived officially:

is it regarded as an alternative finance like green and ethical financing? Or as
an alternative in the sense of having the potential to replace existing conventional
finance as some protagonists of IF may have portrayed the move by British
governments in adopting a welcoming attitude towards the presence of IF in
Britain? According to UK official sources, IF simply denotes to the subsection of
the financial services industry that complies with the principles of Shar ah (Islamic
Law)13. These sources pointed out that the most important principles upon which
IF framework rests are14:
Prohibition of the payment and receipt of interest15: money itself is

considered to have no intrinsic value it is merely a store of wealth and a
medium of exchange.
Prohibition of uncertainty or speculation16: everybody participating in a
financial transaction must be adequately informed and not cheated or misled.
Prohibition of financing certain economic sectors [or activities] (ethical
dimension of IF): investment is forbidden in those activities viewed as socially
detrimental. These include gambling, pornography, and alcohol.
Importance of profit and loss sharing: the investor and the investee must
share the risk of all financial transactions17.
13 HM Treasury, 2008, The Development of Islamic Finance in the UK: the Governments
perspective, p. 5.
14 Ibid., p. 7.
15 This is the very apparent and the most important feature of Rib in nowadays financial practices.
16 This is an imprecise translation of the word Gharar, which can be best, translated as alea, or aleatory
contracts. Also information asymmetry and zero-sum game can be of great benefit in exploring the
wider context of Gharar in Islamic law.
17 This is not the case under Mu rabah, a form of partnership under which one party provides capital
and the other entrepreneurship or work; the parties share in the generated profits but losses are borne
entirely by the capital provider if true and honest information and accounts are disclosed by the
entrepreneur or work provider. This is also not the case under Mur ba ah (mark-up sale), Ij rah
(leasing), Ij rah wa Iqtina (hire purchase), Salam (future delivery of a commodity against pre-
payment) and Isti n (future delivery of manufactured commodity according to pre-agreed
specifications) where the returns on investments are not Rib (interest) but agreed upon at the time of
signing the contracts.
Asset-backing principle: financial transactions should be underpinned by

an identifiable and tangible underlying asset.
Even though that is how IF has been defined and framed, it has been, on the other
hand, perceived as an industry that is widening financial choice by serving not only
Muslim customers, but also customers of other faiths and cultures. In this regard, a
UK official document states: It is often suggested that IF products may be
particularly attractive to those interested in ethical finance, due to certain
characteristics non-Muslim businesses may be attracted to IF to increase their
sources of funds or liquidity 18.
It is within this general context and framework of the nature of IF that the industry
has been accommodated and promoted in the UK financial system over the last thirty
years or so. Due the well placed position of the UK financial, legal and educational
establishments, many of these entities are engaged in providing IF services in one
way or another.
According to an IFSL and the UKIFS reports,19 there are 55 educational

organizations and over 20 law firms involved in this process (Filip et al., 2013:29).
A number of companies that engage in principal investing and fund management are
also operating in the UK market. Some of these are Gulf Finance House, Dar Capital
(UK), Fajr Capital and Al-Salam Europe20.
From the above account, it can be noticed that the UK has positioned itself as an
international gateway for IF finance in the non-Arab and non-Muslim World21. The
following figures provide further evidence to support the aforementioned progress:
18 HM Treasury, 2008, The Development of Islamic Finance in the UK: the Governments
perspective, pp. 7-8.
19 IFSL Research, 2009, Islamic Finance 2009, p. 5 & 6, and UKIFS, 2013, UK, the Leading
Western Centre for Islamic Finance, p. 7.

20 The Muslim Council of Britain, 2009, London and Islamic Finance: Briefing Paper for the Mayor
of London, p.5.
21 The UK is even well ahead of many Muslim and Arab countries.
Figure-1
Number of Banks Providing Shar ah Compliant Services in
Western & Offshore Centres
Russia 1
Luxemburg 1
Ireland 1
Germany 1
Cayman Islands 1
Canada 1
France 3
Switzerland 4
Australia 4
USA 10
UK 22
0 5 10 15 20 25
Source: UKIFS (2013), UK, the Leading Western Centre for Islamic Finance, p.4.
Figures (2) and (3) below show that the UK is well positioned in the education
and research in IF; the UK has the largest educational institutions; universities and
other professional bodies involved in the teaching and training of IF, and in research
output the UK came second after Malaysia. According to a recent report produced
by IFDI of Thomson Reuters: Malaysia is leading in terms of research published
on Islamic finance in the last three years, with 169 research papers, of which 101
were peer reviewed. The UK and USA followed with 111 research papers (56 peer
reviewed) and 73 research papers (39 peer reviewed) respectively. A total of 655
research papers were issued globally on Islamic finance in the last three years, of
which 354 were peer reviewed 22, Trade Arabia Business News Information (2013).
Trade Arabia Business News Information (2013), UK, Malaysia top in Islamic finance research,
22
ww.tradearabia.com.
Figure 2- Number of Establishment Involved in IF

Education Figure -3- Published Peer &
Non Peer Reviewed Papers
No. of Universities Providing Degrees
9 No. of Institutions Providing Courses
UAE
31 USA
21% Malaysia
18 UK 48%
Malysia
50 31%
22
UK
60
0 20 40 60 80
Source: Business Intelligence Middle East (2013) & After Source: Trade and Business News Information
School Higher Education Advisor (2013) (2013).
The above indicators suggest that there is a positive correlation between the
welcoming attitude of the UK authorities, especially those involved in regulation,
and the growth of IF in Britain. This is not a surprise since the development and
promotion of any new business needs an enabling environment that send positive
signals to responsible authorities of that business or industry, and IF is not an
exception in this regard. This fact has been acknowledged in the UK by official and
other sources23. This tendency has caught the attention of other jurisdictions to learn
from the British experiment. For instance, in 2006 central banking authorities in
Canada and Kenya visited the FSA and met representatives of the local banks who
had taken the steps of starting Islamic banking operations, like the Islamic Bank of
Britain, to look into the feasibility of adopting the UK model to enable investors to
start Islamic banking operations in their respective domiciles24. Furthermore, the ex-
Governor of the State Bank of Pakistan, Shamshad Akhtar25, in one of her keynote
speeches in a conference about IF, indicated that developed jurisdictions can pursue
the approach adopted by the UK authorities in welcoming IF in their financial
23 An example of that is UK Trade and Investments assertion that the supportive legislation boosts
UKs world-leading Islamic finance industry. This success has been facilitated by important legislative
changes which have created a dynamic base for Shar ah-compliant financial products. UK Trade and
Investments, (2010). Supportive legislation boosts UKs world-leading Islamic finance industry.
24 Abu Umar Farooq Ahmad and M. Kabir Hassan, (2006). The Adoption of the UK Finance Bill
Proposals on Islamic Finance into Islamic Banking in Australia, p. 51.

25 Shamshad Akhtar, (2007). Islamic Finance- Growth, Competitiveness and Sustainability, p.3.
systems. Indeed, the learning process is not going to take place in the cut and
paste format as each and every jurisdiction has its unique social, cultural and
economic contexts within which it operates.
5. Driving Factors behind Development and Growth of IF in the UK
This section tries to answer the question of why has the UK been able to reach
this Position? In consulting various sources; officials and others and observing the
developments and growth on the ground the authors of this research came to the
conclusion that several factors have attributed to the rise of this phenomenon. This
is being the case, it has to be stated that the elaborated factors do not carry the same
weight as far as their importance and role is concerned. Among the paramount
factors the following can be identified and explored:
1. The nature of the political system (pragmatism, realism, and inclusiveness). In

various documents and occasions, the UK government and its officials spelt out
the supportive and ambitious attitude relating to the development of IF in the UK.
For instance, in the official document published at the end of 2008, the UK
government stated that its main objectives of the development of IF in the British
Isles are two-fold26: First, to enhance the UKs competitiveness in financial
services by establishing the UK as a gateway for international Islamic finance;
and second, to ensure that everybody, irrespective of their religious beliefs, has
access to competitively priced financial products. In this regard, the story of Lord
Edward George, the former governor of the Bank of England, and a Muslim
family, has been mentioned in various sources to indicate the inclusiveness
approach adopted by the British authorities to make sure that everyone in the
British society, regardless of faith and ethnicity, has access to a competitive and
appropriate level of financial services and products. That incident drove the
attention of Mr. George to IF since the beginning of the nineties. In 2003, he
wrote about this: I became interested in it [IF] more than a decade ago when I
met a very lovely, deeply, religious, Muslim couple who were living in this
country with their family, and who had recently bought a house on the back of a
conventional mortgage. They told me of their delight in their home, but then they
explained to me not at all in an aggressive way, in fact in sorrow rather than
anger- their regret that they had had to go against their religious principles to
finance it. That made a big impression on me I thought our very inventive
financial system could find ways of meeting the needs of the different sectors of
26 HM Treasury, 2008, The Development of Islamic Finance in the UK: , p. 13.

our society in ways where this kind of problem need not arise27. This concern
has been reiterated and carried out by other officials, like the Chairman of the
FSA. In a speech delivered at the Muslim Council of Britain Islamic Finance
and Trade Conference, the then chairman of the FSA, Mr. Callum McCarthy
stated: It would have been an invidious form of social exclusion for regulation
to have prevented the development of financial products which conformed with
their religious beliefs [Muslims living in the UK], and therefore to have
condemned them to a position where their religious beliefs prevented them from
accessing financial services. We at the FSA have been concerned to avoid this
28
. It is clear that the above quotes and initiatives represent part of the government
policies to combat social exclusion29.
2. The Nature of the Version of the Capitalist Model Adopted. It is a well-
recognized and established fact that there are varieties of capitalist models that
have been adopted and implemented in various places throughout history, in the
localities where capitalism has been the prevailing economic model. This has led
some economists to compare this phenomenon with the varieties of products
launched by companies to preserve their competitive edge and to meet customers
preferences. The late American economist Hyman Minsky was once asked about
this; his reply was: At one time the slogan of the Heinz pickle and ketchup
company was "57 Varieties". When I make the point about the varieties of
capitalism in America, I often say that "There are as many varieties of Capitalism
as Heinz has of pickles."30 The implications of such a fact at the practical level
center around the emphasis on the more liberal and less interventionist view of
the state in the economic affairs vis--vis the more socially oriented version. In
the 1980s of the last century, liberalism dominated the political and economic
scene in the UK. As a result, private ownership, liberal norms in business and
deregulation of the financial system have been the main tools relied upon to
attract foreign investments to the UK market. Within that context, IF saw its early
entrance and development in the UK. As time passed by, other factors, such as
the tremendous growth rates and spread of IF influenced the approach adopted
by the UK authorities to establish London as an International hub for IF.
3. London as a Leading International Financial Centre. Since the 17th century,
London has developed a tradition, of open attitude towards innovation and new
27 Edward George, 2003, Towards Islamic House Financing in the UK, p. 73.
28 Callum McCarthy, (2006). Regulation and Islamic finance, Speech delivered at the Muslim
Council of Britain Islamic Finance and Trade Conference, 13 June 2006. Available at: www.fsa.gov.uk.
29 Michael Ainley, (2008). Listing and Regulating Sukuk in the UK, p. 6.
30 Hyman Minsky, (1993). "Finance and Stability: the Limits of Capitalism", May 1993, WP #93, p.4.
ideas31 in the financial sector. Wilson (1999) noted that: London has turned out
to be the largest market in the world for foreign exchange dealing, and the largest
Centre for interbank transactions and syndicated lending. This observation is
still supported by the recent data and information. According to the latest
available data in April 2013, trading in the United Kingdom accounted for 41%
of the total, making it by far the most important Centre for foreign exchange
trading. Trading in the United States accounted for 19%, Singapore 5.7%, which
is surpassing Japan for the first time and, finally Japan is in the fourth place
accounting for 5.6%, (Kristine Aquino, 2013). In addition, the London Inter-Bank
Offering rate, or LIBOR for short; which represent the average interest rate
estimated by leading banks in London that they would be charged if borrowing
from other banks, is used as a benchmark in the pricing of many financial
products including Islamic ones. This is due to the flexibility and welcoming
response of its financial system in order to maintain a competitive edge over its
rivals. Several analysts, observers, politicians and academics have pointed out
this factor32. For instance, Rodney Wilson, former professor of economics at
Durham University, noted that The UK has been a gateway for IF to enter
Europe, partly reflecting the role of London as the leading international financial
centre, but also as a consequence of the exposure of leading British banks to the
Arab and wider Islamic World and their knowledge of these markets33.
Furthermore, after the introduction of the latest legislation in 2010 related to
alternative finance investment bonds (AFIBs) or uk k, Sarah McCarthy-Fry, the
Exchequer Secretary to the Treasury, stated that: Islamic finance is an area that
has been helped by the openness to new influences and ideas that we have here
in the UK. With our depth of skill, experience and connections all around the
world, we have ensured that the UK has long been the leading Western centre for
Islamic finance34.
4. The Flexibility of the Legal System and the Nature of the Adopted Regulatory
Framework. With regard to flexibility, it is noted that the existence of trust laws
and equity principles under the British common law has given the UK
government enough room to deal with the ownership matters that arise in the
structures of most of IF instruments. In terms of regulation, Norton Rose, a key
adviser for many Islamic transactions noticed that the steps taken by the UK
31 Ainley et al., (2007). Islamic Finance in the UK: Regulation and Challenges, FSA, November
2007, p. 11.
32 See also Howard Davies, (2002). Islamic Finance and the FSA, pp. 104-105. Mr. Davies was an
FSA chairman in the period 1997-2003.

33 Rodney Wilson, (2007b), Islamic Finance in Europe, p.2.
34 UK Trade and Investments, (2010). Supportive legislation boosts UKs world-leading Islamic
finance industry.
authorities, in this regard, played a decisive role in the advancement of IF in this

country: For the last few years, HMRC have been very receptive to
representations made for tax treatment of Islamic finance to be more onerous than
conventional finance. These changes should ensure that there are now no UK tax
obstacles in issuing uk k backed by UK land. These tax changes will give
considerable boost to the UK Islamic finance initiative and ensure that in these
difficult times alternative sources of finance will be available in the UK35. More
importantly, the use of English law in the development of IF products and in the
dispute settlements relating to IF transactions outside the UK have also played a
role in consolidating Londons position as an International hub for IF.36
5. The Establishment of a Single Regulator that Oversees the Operations of the
Whole Financial Sector. The FSA was established by an Act of legislation37, the
Financial Services and Markets Act (FSMA) 2000. Thus, the FSA has combined
the work of 11 different regulators into a single body under a single piece of
legislation, and since the end of 2001 the FSA started its operations as the main
statutory regulator for the UK financial services industry. This development may
have quickened the process of the establishment of IFIs in the UK letting a single
body to decide upon the licensing applications, rather than multiple entities as
was the case under the old regime. In addition, the FSA has benefited from the
initiatives taken by its predecessors as there was no lack of dialogue and
discussion between the previous regulators and IF stakeholders, especially the
Muslim community living in the UK38. Furthermore, the UKs principle-based
regulatory structure, which is designed to accommodate a range of financial
structures to suit multitude clients may have played a part in this development as
well, thus giving the City of London more flexibility than its competitors
elsewhere39.
6. The Remarkable Growth and Expansion of the IF Industry, in almost all Places
of the Global Financial Village, over the Past Few Years. This phenomenon has
been attributed to several factors; the infancy of the industry, the liquidity
accesses in the Gulf, the low levels of financial penetration in many Muslim
countries and communities, and the rise of the emphasis on the ethical and moral
35 Gillian Walmesley, (2011). Another year of growth and development for the London Stock Exchange
markets for Islamic finance, pp. 1-2.
36 Aziz Tayyebi, (2008). Islamic Finance: An Ethical Alternative to Conventional Finance?, p. 5.
37 Ainley, et al., (2007). Islamic Finance in the UK: Regulation and Challenges, FSA, November
2007, p. 11.
38 Howard Davies, (2002). Islamic Finance and the FSA, p. 103.
39 The Muslim Council of Britain, (2009). London and Islamic Finance: Briefing Paper for the Mayor
of London, p. 6 & Gillian Walmesley, (2011). Another year of growth and development for the
London Stock Exchange markets for Islamic finance, p. 1.
dimensions in financial dealings and practices in the aftermath of the recent

financial turbulences. In addition, the traditional base (i.e. The Arab and Muslim
Worlds which constitute 1/5 of the World population with 1.8 billion inhabitants
that are growing by 1.5 per cent per year) of the industry is so vast and many of
its countries and regions are financially and economically underdeveloped, but at
the same time they have displayed good economic growth in the last few years
and are projected to pursue that path. For example 253.9 million Muslims live in
the 10 fastest growing economies in the World between 2011 and 2015, (Quilter-
Pinner and Yan 2013). Furthermore, these places are generally unbanked, thus
demand for financial services will continue to rise; governor of the central bank
of Malaysia (Bank Negara), noted in one of her latest lectures that: in many IDB
countries, studies have shown that economic development is constrained by lack
of access to finance, given that only 30 per cent of adult population use formal
financial intermediaries, (Aziz 2013). Besides, various surveys conducted
recently and in the past few years reveal the face that a significant portion of the
Muslims, if given the choice, would opt out for IF, (Organization of the Islamic
Cooperation SESRIC40 2012: 12). In addition, demand for Islamic financial
services is not confined to Muslims only, but non-Muslims may show interest in
this kind of alternative or ethical financing. In Malaysia, for instance a quarter
of IF customers are non-Muslims, (Quilter-Pinner and Yan 2013; Ali S. S. 2011:
21). Having observed this general trend about the whole traditional base of IF, it
has to be noted that the development of IF varies from one region to the other.
Ernst and Young (2012) pointed out that North Africa is the least developed in
this regards if compared to others; especially the Gulf and Malaysia. The report
categorically analyzed the status of three countries; Morocco, Libya and Oman.
In 2010 these countries had no Islamic financial institutions, but they have taken
legislative measures to accommodate the industry. The report estimated that by
2015 these countries will have IF markets worth $10bn, $5bn and $8bn
respectively. The report also projected that the industry will make an impressive
progress in Algeria, Egypt and Saudi Arabia. The industry will grow by 1192%
in Algeria, by 395% in Egypt and by 220 in Saudi Arabia41.
7. The Active Role and Involvement Carried out by some Muslim Community
Organizations. It has already been mentioned that the Islamic Foundation, UK
played an instrumental role in the advancement of Islamic Economics and Islamic
Finance, not only in the UK, but elsewhere through publications and other means
of the dissemination of Islamic economics knowledge. There are other
40 Statistical, Economic and Social Research and Training Centre for Islamic Countries.
41 One has to treat these estimates and figures with caution as the political climate has changed
dramatically in some places like Egypt and is still unstable in some other places like Libya. If the unrest
at the social front, in Many Arab and Muslim countries, is added, the situation will be more blurred.
organizations as well. For instance, the Muslim Council of Britain (MCB)42; a

non-profit national Muslim organization has set up in 2005 a Business and
Economics Committee (BEC). Reviewing the tasks that this committee has
carried out, since its inception till now, show that IF has been present all along.
The committee has good connections with the governments bodies like the FSA,
the Treasury, trade and industry, and the CityUK. Through these links the ECB
got engaged with various activities: consultation on tax amendments for IF
products, increasing IF awareness through publication of special reports43,
participation in international events (e.g. heading the British delegate that
participated in the 5th WIEF (2009) and attending the 9th WIEF), organizing
public lectures, symposia, giving introductory courses about tenets and
operations of IF, and holding meetings with business and political personalities
(e.g. Sheikh Saleh Kamel, the Saudi Businessman and Gordon Brown the ex-
Chancellor of the Exchequer). The other noticeable entity is the Islamic Finance
Council UK ("IFC")44; a Scotland based organization that has been established
by some active Muslims for the sole role of promotion and enhancement of IF in
the British Isles. Since its inception, IFC has initiated many programs that aim at
promoting the IF industry in the UK. Among these are: engagement with
government bodies at the local and national levels, and awareness campaigns to
increase IF outreach amongst key stakeholders within the society and particularly
among Muslim community. Since 2005 the IFC has been holding a series of
round table forums and conferences attracting leading industry players. Indeed,
there are other individual and collective initiatives like 1st Ethical, but they are
not engaged in the sort of activities that fits the research framework.
There are, of course, other factors such as the English language, as an
international financial and business language, and close trade ties between Middle-
Eastern countries, especially from the Gulf, and the UK.
42 The MCB is a national charitable organization that has been set up in 1997 by Muslim community
leaders to act as an Umbrella for different Muslim organizations. Currently the MCB represents over
500 affiliated national, regional and local organizations, mosques, charities and schools. Source:
www.mcb.org.uk.
43 The latest is The Muslim Pound: Celebrating the Muslim Contribution to the British Economy.
The report has been launched at the 9th WIEF that was held in late October in London.
44 The IFC is a not for profit body established to promote and develop the Islamic finance industry. Its
work focuses on two broad areas: advisory and promotion of IF. In IFC provides advisory in three main
areas: Training & Education, Research and Tailored Solutions. For more information visit the IFC web
site.
6. The Regulatory Process of Accommodating IF in the UK:

Phases, Steps and Lessons
From the available data and information, Shar ah compliant products were first
introduced in the UK markets since the early 1980s and they have been steadily
developing and growing till this moment. The regulatory approach and attitude
adopted by the UK authorities can be summarized in three main phases as illustrated
by the following figure (4):
Figure-4
Summary of the Regulatory Phases pursued in the UK
It is clear from the above account that the UK authorities have been accustomed
to IF services and products for a very long period. During this period, IF industry
witnessed significant developments. Those developments were captured and
translated by British officials into policies that allowed IF to flourish on a gradual
process in the UK. So, despite the ambitious intention of the government, as
mentioned in the previous section, with regard to the development of IF in the UK,
the government did not rush into hasty decisions and policies. As a result the changes
came into being only over the last few years, as illustrated by the table given below:
Table-2
Examples of Introduced Changes to Finance Acts
Date Changes
2003 Removal of the double charge of Stamp duty Land Tax (SDLT) for Mur ba ah
& Ij rah contracts. Thus allowing individuals to purchase homes. Other
measures were introduced as well to offer Islamic products for Child trust fund,
asset finance and ISAs.
2005 Extension of the removal to diminishing Mush rakah (another mode of
alternative finance).
2006 Extension of removal to beneficiaries (i.e. companies).
2007 Discussion of applying the same tax rules of conventional debt instruments like
bonds to uk k (Islamic Bonds).
2008 Dealing with more issues relating to the issuance of uk k.
2009 Legislative measures for SDLT, Capital Gains Tax (CGT), and capital
allowance rules for land transactions involved in the structuring of uk k
instruments
2010 The Financial Services and Markets Act 2000 Order 2010 exempts alternative
finance investment bonds (AFIBs), a class of debt-like security which includes
uk k, from collective investment scheme (CIS) regulations
The practical steps derived from the UK approach in accommodating IF can be

summarized in the following diagram:
Figure-5
Practical Steps of the UK Approach in Accommodating IF
Step 1: Analysis & Understanding.
Step 2: Definition & Economic Function/Substance
Step 3: Enlisting all Possible Routes/Scenarios
Step 4: Applying Existing Rules Whenever that is Possible and/or

Introduction of Appropriate Legislation Amendments as a Last
Resort Measure.
The analysis has been carried out by working groups, such as the Islamic Finance
Expert Group (IFEG) and the Tax Technical Working Group (TTWG) and through
the various consultation papers to make sure that an in-depth analysis has been
carried out, looking into the various aspects and implications of IF services and
products. Furthermore, the process has been conducted through the following
general guidelines45:
Figure-6
General Guidelines Governing the Steps Taken by the UK Authorities
Defining the Product on a Case-by-Case Basis: be it Mur ba ah, Ij rah, Wak lah, etc.
Identifying the Obstacles: Such as Double Stamp Duty, or Risk Weighing of Different
Products.
Approaching the Appropriate Authority: The Treasurty, the FSA, the Inland Revenue
45 Edward George, (2003). Towards Islamic House Financing in the UK, p.77.
For example, in the second step (Figure 5) the first group that was chaired by
Edward George identified four main obstacles in the area of the provision of
Islamic home financing. These were46:
1. Treatment under Stamp Duty whereby duty may need to be paid twice, or at a
higher rate than on a conventional mortgage because of the nature of the
transaction involving the initial ownership by the financier.
2. Higher regulatory capital charges where conventional mortgages and indeed
Murbahah mortgages- attract a capital risk of 50%; but some Islamic
mortgages Ijrah mortgages- attract a higher rate of 100%.
3. Disadvantages under the various public sector home ownership schemes
such as Right to buy or Rent to mortgage, whereby the purchaser may be
unable to take advantage of the benefits offered under the schemes due to the
involvement of the financier as the owner of the property.
4. Disadvantages in terms of the housing cost element of Income support or
income-based Jobseekers Allowances as compared with that of a
conventional mortgage.
Subsequent groups have come across other obstacles as the process of

accommodating IF products and services widened to include more products and
more interested economic agents as shown in the above table (2). As a result, the
process has been lengthy as the introduction of IF products and services have wider
implications that need to be taken into consideration to avoid any unintended
outcome. The treatment of uk k given below provides a typical example of how the
process has been carried out to reach the appropriate policy.
The Example of uk k
The UK government has shown interest in uk k since 2006, after the Brown
speech, the then Chancellor of the Exchequer, promising to promote the City as the
international financial centre. Part of that strategy was to look into the economic
potential of uk k as an alternative, but complementary instrument to conventional
bonds that can be used to widen government options in diversifying the sources of
its financing. Figure (7) below gives a summary of the initiatives taken between
2006 and 2013:
46 Ibid, pp. 74-75.

Figure-7
UK Initiatives with Regard to uk k, between 2006 and 2013
Interest in uk k after the Brown famous speech, [FSA briefing note BN016/06
2006 Islamic Banking in the UK].
Discussion about the possibility of issuing sovereign uk k in sterling.

April
2007
No sovereign uk k to be issued. Reason: would not offer value for
June money. [The Treasury, the Development of IF in the UK, Dec. 2008, p. 11].
2007
Consultation paper about how to legislate for the issuance of uk k
End especially when corporate.
2008
Responses received.
End
2009
Order 2010 of the FSMA 2000 for alternative finance investment bonds
Early (AFIBs) came into being.
2010
Oct.
The British government announcement that it will issue 200 Million pound
uk k in 2014. The British Prime Minister pledge at the 9th WIEF in London.
2013
After the analysis and the consultation process, the outcome has been to enlist all
possible routes/options and then select the most appropriate.
1. The Enlisted Routes/Options47:

Option 1: Introduction of a unique regulatory definition for AFIBs ( uk k) to
exempt explicitly these instruments from CIS regulations and to create a new
specified investment under the Regulated Activities Order (RAO).
Option 2: Same as (1), but AFIBs will be come under the existing tax
definition.
Option 3: Same as (1), but includes AFIBs under existing specified investment
of creating or acknowledging indebtedness.
47 HM Treasury & FSA, (2008). Consultation on the legislative framework for the regulation of
alternative finance investment bonds (Sukuk), p.3 & HM Treasury & FSA, (2009). Legislative
framework for the regulation of alternative finance investment bonds (Sukuk): summary of responses,
p. 4.
Option 4: Do nothing.
2. Selecting the Appropriate Option. The government opted for the first option as
laid down in the order 2010 of the FSMA 2000 for alternative finance investment
bonds as indicated above.
That approach led the government to conclude that, while its objectives for IF
are ambitious it is,[nonetheless], committed to ensuring that behind these
ambitious objectives, the necessary analysis, consideration and consultation is
carried out to deliver real benefits to industry and consumers in the UK48.
From the previous examination of aspects relating to the accommodation of IF in

the UK, the following lessons can be drawn:
Need for clear-cut objectives (i.e. city competitiveness & citizens access to
financial products) and guiding principles (commitment, fairness &
collaboration). Thus, subsidence of ideological and cultural sensitivity is of
prime importance for an accommodative environment that is open to new
ideas and innovations, irrespective of their origin, provided that they are of
benefit to the society in general, or to an important part of its citizens.
Thorough analysis through high-profile groups and consultation with various
parties and departments concerned.
Gradual and progressive process.
Resolute and steady development.
Stakeholder approach: On opening the door for IF, the UK authorities have
involved several bodies and entities on their side as well as those on the IF
industrys side. In particular, the Muslim community residing in the UK was
involved in the process from the outset.
Taxation as the main tool for legislating IF products and services. The main
guiding principle of this process is to look into the economic substance of the
transaction rather than its legal structure or form, based upon the no
obstacles, no special favors policy. Hence IF products and operations have
be treated as if they were interest-bearing instruments. Based on these
48HM Treasury, *2008). The Development of Islamic Finance in the UK: The Governments
Perspective, p. 14.
considerations, the following principles have been applied to accommodate IF

products into the tax bills49:
1. Treatment should follow the economic substance of the transaction.

2. Treatment should be on the same basis as equivalent financial products that
bear interest.
3. Ordinary tax rules should be applied where possible.
4. Rules that give undesirable or unpredictable results should be amended.
7. Concluding Remarks and Issues for Future Consideration
In the preceding sections we examined and analyzed various aspects related to

the growth and development of IF in the UK. On the basis of that analysis and
discussions, the following concluding remarks and/or issues for future exploration
can be made:
IF has grown remarkably in the UK over the years. Many factors have been
attributed to this growth. Political and regulatory factors have been identified
as overriding elements in this process. An important feature of this
development is the supportive government policies intended to broaden the
market for Islamic products for both Shar ah compliant institutions and firms
with Islamic windows. The development of Islamic finance has also enjoyed
cross party support over the past decade with two key policy objectives:
firstly, to establish and maintain London as Europes gateway to international
Islamic finance; and secondly, to ensure that nobody in the UK is denied
access to competitively priced financial products on account of their faith
(UKIFS, 2013).
Important lessons can be learnt from the British experiment. This, by no
means, should be interpreted as a call for the adoption of a cut and paste
solution but rather, it is a call to get inspiration from this experience by taking
things even further than the UK. This is because every country has its unique
characteristics and circumstances that should be taken advantage of in todays
very competitive and complex environment, through the comparative
advantage notion that served the growth of trade and mutual exchanges
between nations over the centuries.
49 Ibid, p.19.
There are regional and international contenders who are trying to rival the
UKs positioning of London as a hub for IF outside the Muslim world. Will
this reality push the UK authorities to take further measures for
accommodating more products and institutions of IF? Or do they consider
their position well ahead of their rivals? Hence, time will play in their side in
observing and responding comfortably to the steps that their rivals might take.
As for the issues for future consideration the following points can be made:
o Does it make a great difference and impact, at the practical level, to adopt
the minimal changing approach as is the case with the UK, or the dual
approach as is the case with Malaysia and Bahrain, for the following
stakeholders?
Industry players
Shar ah boards
Lawyers.
In other words, are there big differences between the two approaches? Or are they
almost identical in their final impact on the welcoming process of
accommodating IF in conventional systems?
o If Islamic Finance is regarded as a true equity and asset backed industry
and has been easily accommodated into conventional system, can a
serious debate be initiated about providing level playing field for equity
modes of finance in relation to the favours given to debt modes of
finance to put an end to the biased legislative regimes that have affected
the emergence of abnormalities in the practices of economic agents in
the prevailing financial system? In other words, can a legal shift be attained
to allow more equity and participatory modes of finance to play a greater
role in the financial intermediation process?
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Islamic Economic Studies

Vol. 22, No. 1, May, 2014 (37-78) DOI No. 10.12816/0004130

Islamic Finance in the United Kingdom:

Keywords: Islamic finance, banking, finance, FSA, UK

Islamic Development Bank, Jeddah, Saudi Arabia. E-mail: achachi@isdb.org

2. Review of the Literature

Wilson (2007) looked at the latest developments about "Islamic finance in

At the official level, the UK government published two important documents in

Khan (2012) analysed the perception and awareness of non-Muslims towards

3. Development of Islamic Finance: An Overview

Bank), Wadi Mizab.

El-Naggar (1978:230-232) reported that: Paradoxically, yet not surprisingly, it

The second successful experiment in this regard, happened approximately at the

Enabling Malay Muslims to save gradually, in order to support their

4. The Developments of IF industry in the UK

4.1. The Earliest Developments up to the year 1999

In 1976, soon after the First International Conference on Islamic Economics,

Research in Islamic Economics (CRIE) at the University of King Abdul Aziz

4.2. The Latest Developments from 2000 onward

In 2000, one of the famous UK Universities10 hosted the 4th International

10 The University of Loughborough, UK

Reform of arrangements for issues of bonds so that returns and income

financial Centers. According to the Global IF Forum (GIFF, 2012:9) report at

Name of Inception Nature of Work and Activities

This is in addition to the provision of Shar ah compliant accounts by an estimated

Finally it is important to make a note about how IF is being perceived officially:

Prohibition of the payment and receipt of interest15: money itself is

Asset-backing principle: financial transactions should be underpinned by

According to an IFSL and the UKIFS reports,19 there are 55 educational

Western Centre for Islamic Finance, p. 7.

Figure 2- Number of Establishment Involved in IF

Proposals on Islamic Finance into Islamic Banking in Australia, p. 51.

5. Driving Factors behind Development and Growth of IF in the UK

1. The nature of the political system (pragmatism, realism, and inclusiveness). In

26 HM Treasury, 2008, The Development of Islamic Finance in the UK: , p. 13.

FSA chairman in the period 1997-2003.

authorities, in this regard, played a decisive role in the advancement of IF in this

dimensions in financial dealings and practices in the aftermath of the recent

organizations as well. For instance, the Muslim Council of Britain (MCB)42; a

6. The Regulatory Process of Accommodating IF in the UK:

The practical steps derived from the UK approach in accommodating IF can be

Step 1: Analysis & Understanding.

Step 2: Definition & Economic Function/Substance

Step 3: Enlisting all Possible Routes/Scenarios

Step 4: Applying Existing Rules Whenever that is Possible and/or

Subsequent groups have come across other obstacles as the process of

46 Ibid, pp. 74-75.

Discussion about the possibility of issuing sovereign uk k in sterling.

1. The Enlisted Routes/Options47:

From the previous examination of aspects relating to the accommodation of IF in

considerations, the following principles have been applied to accommodate IF

1. Treatment should follow the economic substance of the transaction.

7. Concluding Remarks and Issues for Future Consideration

In the preceding sections we examined and analyzed various aspects related to

Ahmad, A. U. F. and M. Kabir Hassan, K. (2006). The Adoption of the UK Finance

Belouafi, A. and Belabes A. (2011) Islamic Finance in Europe: The Regulatory

El-Naggar, A. (1978) Islamic Banks: A Model and a Challenge in Gauhar (ed.)

HM Treasury, (2008), The development of Islamic finance in the UK: the

Wilson, R. (2007) "Islamic banking opportunity or threat?" Common Ground