Can Islamic Fintech Help to Power Western Economies?
As a British Muslim, I am all too aware that Islam can be a scary word to many people in the UK and the US nowadays. But it need not be – in an age in which Islam and Islamic law, or Sharia, is increasingly demonised, I believe an economic model espoused by the principles of justice, equality and transparency has the power to unite people of divergent beliefs and create wealth at all levels in society. These principles are not unique to Islam – they are universal values that can contribute to a just, tolerant and progressive society.
An austere interpretation of Islam that has caused panic among some in the West is merely a recent phenomenon, one that runs counter to a history of transformation and inclusiveness, a history that is rarely taught in the West. That history encompasses over a millennium of legal development framed by a middle path and cultural context. Whilst Europe experienced its Dark Ages, the Muslim cities of Cordoba and Baghdad made momentous advances in mathematics, astronomy, medicine, art, architecture, agriculture and economics that are now often sadly unattributed. Just as Europe’s Renaissance borrowed heavily from Islamic philosophy, arts and sciences of the Middle Ages, so too had Islamic scholars borrowed and learned from earlier cultures, imbuing Sharia with an organic and fluid vitality that adapted to the demands of a changing world.
Post-colonial Islamic movements and an orientalist view of the world seem to have ignored a historical tendency for a more inclusive interpretation of Islam, one that co-exists with other cultures. At a time when the world is experiencing extremes of political and ideological thought, perhaps the Islamic economic model and the Islamic finance industry can help to bridge the gap between cultures.
Asset-Backed & Real Economy Based
That economic model is asset-backed and real economy based: finance is merely a lubricant for the creation of wealth at all levels in society. Money is to be treated as a medium of exchange and not a commodity to be traded. In theory this means that wealth cannot be created merely by the act of owning money: it must be invested in real industry, and share equitably in the risks and rewards. The financial economy is the real economy.
But the Islamic finance industry has a fundamental problem today: it is run substantially by conventional bankers and operates within a framework that expects Islamic banks to “reverse engineer” debt-based banking products. The UK is a perfect example of the challenge Islamic finance is experiencing: despite an enviable legal and regulatory framework supported by progressive UK governments, all five of the original British Islamic banks set up in the early 2000s are or have recently experienced significant restructuring to ensure their commercial viability.
White Paper on Islamic Finance in the UK
This week, with support from IslamicBanker, I have written a white paper for Her Majesty’s Treasury entitled “Putting the City and the UK Economy Back on the Global Islamic Finance Map”. In it, I reject the commonly accepted rhetoric that London is a global centre for Islamic finance. It’s true that historic support by Her Majesty’s Government has helped to level the playing field for Islamic finance by, for example, removing double taxation on stamp duties. Such legal and regulatory reforms have in the past made the UK - and specifically the City of London - the envy of the Islamic finance world, with many other jurisdictions relying on talent exported from London to develop their own expertise.
But London has fallen way behind. Attend any conference on the subject here and you can be sure senior politicians and industry executives will publicly play up the very many superb qualities that ought to attract the Islamic finance industry to the City, but ignore (wilfully or otherwise) the domestic industry’s stagnation and its lacklustre contribution to the UK economy. My white paper explores these areas of competitive weakness versus the real powerhouses of Islamic finance, like Dubai and Kuala Lumpur.
One of the more controversial reasons I identify for the decline of Islamic finance in the UK is paradoxically the issuance in 2014 of the UK sovereign sukuk, a sukuk being an Islamic bond, much like a US Treasury bill or a UK gilt but with coupon payments derived from the rent of a real asset. At the time, the sukuk issuance was much trumpeted as a demonstration that the UK leads the non-Islamic world in Islamic finance. In fact, the several excruciating years it took for the British government to bring it to market, as well as the tiny issuance size (£200m), plus the failure to appoint a homegrown champion in the form of one of the UK Islamic banks as a co-lead arranger meant that the investment banking teams of the British Islamic banks packed their bags and called it a day. The recent announcement from the British government that it will refinance the sukuk when it matures in 2019 will, in my opinion, contribute practically nothing to the UK Islamic finance industry or the UK economy.
Islamic FinTech: A Game-Changer for the Industry
But it’s not all doom and gloom. If the British Islamic banks are struggling to move the needle, I believe there is an area where the UK can become a world leader: Islamic fintech. We already know the future of finance lies in financial technology. As a result, fintech-enabled non-bank financing is growing faster than traditional banking. And non-bank financing can be inherently aligned with the principles of Islamic finance because in many cases it does not rely on merely reverse engineering traditional banking products. It is disruptive in the same way that an Islamic economic model is disruptive. The combination is exciting and powerful.
We know that London is vying with Singapore, New York and Silicon Valley to be the highest ranked destination for fintech companies. HM Treasury’s ambitious fintech policy framework is rooted in competition and innovation which has enabled the City of London to become a proven world leader. A similar set of policy initiatives with tangible outcomes has the potential to put the UK back on the global Islamic finance map.
I have made two key recommendations to HM Treasury: firstly, to set up an independent Islamic fintech panel to position the UK as a world leader in Islamic fintech, and provide delivery support to Sharia compliant fintech companies. The second is to support the creation of a fintech-enabled UK SME fund, to plug the enormous funding gap which is hindering the development and growth in the lifeblood of the UK economy, its mid-market companies. By being Sharia compliant, such a fund would attract foreign direct investment from highly liquid Islamic investors and institutions in the Arabian Gulf and Southeast Asia. The fund would simultaneously boost the UK economy as well as once again re-establish the UK as a global centre for Islamic finance.
These initiatives have the potential to be game-changers for the industry. For me, the power of Islamic finance resides in its ability to democratise finance, to make it inclusive and enabling for all of society and thus bring people of all faiths or none closer together. Banks will always have a role in the provision of finance, but as non-bank financing and financial technology increase in influence, the direction of the global finance industry is self-evident. Islamic finance must also take that path, and where better than London to blaze the trail.