UK central bank unveils Islamic finance liquidity alternative
The Bank of England has unveiled a liquidity alternative for firms in the UK offering Islamic finance products.
Sharia-compliant banking forbids users from earning or paying interest.
This means Muslim customers in less densely populated Islamic regions, like the UK, have historically struggled to find products which suit their financial needs.
The UK’s central bank now proposes a new deposit facility. One which is not based on interest and is backed by a return-generating fund made up of Sharia-compliant assets. It will also refrain from investment in prohibited substances or industries under Sharia law, like gambling and alcoholic drinks.
How it works
The Bank of England’s executive director for markets, Andrew Hauser, announced the new vehicle at Islamic Finance Week. It is set for testing in early 2021.
He claims it will be the “first such account from a Western central bank”.
Called the Alternative Liquidity Facility (ALF), the account introduces greater flexibility to what a high-quality liquid asset (HQLA) is.
Historically the definition of a HQLA has remained restrictive. Basel III liquidity rules class Sharia-compliant bonds (sukuk) as HQLA, but they’re subject to restrictions.
“The proportion of sukuk classed as eligible for regulatory buffers remains relatively modest compared to demand,” explains Hauser.
The return-generating fund which backs this new deposit facility 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. “It will be well placed to exploit the growing diversification of available HQLA-eligible sukuk assets,” says Hauser.
Bid to boost UK as Islamic finance hub
Islamic finance globally held assets of $2.4 trillion in 2019, according to the Islamic Financial Services Industry Stability Report. That’s 11% higher than a year earlier, and at least a third higher than in 2015.
The four incumbent UK Islamic banks hold some £5 billion in assets. And some 12 high street banks currently offer Sharia-compliant banking services.
Hauser argues that outside the Middle East, North Africa, South and South East Asia, “the centre of gravity for Islamic finance lies” in the UK.
He believes the new deposit account will help further boost the UK’s reputation as a hub for Islamic finance.
He’s sure the pandemic won’t slow innovation in the sector either. The central bank director argues that during COVID-19, Islamic values have aligned with the economic recovery of the country as a whole.
These include “prioritising equity-like risk-sharing over debt, and “factoring ethical and environmental considerations into investment decisions”.
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.
The UK is now home to a growing 27 Islamic fintechs, ahead of Malaysia, Indonesia and the United Arab Emirates (UAE).