Why the UK Central Bank offers Sharia banking

D.he Bank of England has decided to set up a Sharia-compliant deposit facility with no interest payments. According to Sharia, Islamic law, banks are not allowed to take or pay interest. They are therefore switching to profit-sharing models. The UK central bank will open a new “Alternative Liquidity Facility” in the first quarter, she announced. It will be the first central bank in Europe to open a deposit facility for banks that operate according to Islamic guidelines, writes the rating agency Moody’s. The central bank’s deposit facility is a type of account that commercial banks can use to park excess liquidity. For the Sharia banks, this would offer improved liquidity management options.

Andrew Hauser, Director of Market Operations at the Bank of England, recently highlighted the role of Islamic banks in overcoming the Corona economic crisis in a speech at “Islamic Finance Week”. Without a doubt, their importance is growing, driven by the money of the rich Arab Gulf states. In 2019, according to Hauser, Islamic financial institutions around the world had $ 2.4 trillion of assets under management, a third more than in 2015. Three quarters of these assets are managed by banks. There are also more than 1,500 Sharia-compliant mutual funds. The focus is on the Middle East, Asia and North Africa.

First sharia-compliant government bond

Great Britain and the financial center London also hope to get a part of the growing pie of Islamic banking. The Bank of England and the financial supervisory authority have adapted parts of their financial market regulations to this end. In 2014, the UK Treasury issued the first Sharia-compliant government bond, a “Sukuk”, outside the Islamic world.

There are four Sharia-compliant banks in the British Isles that offer account services and manage £ 5 billion in assets: Al Rayan Bank, BLME (Bank of London & The Middle East), Gatehouse Bank and UBL from Pakistan. The new “Alternative Liquidity Facility” of the British central bank should accommodate them. Instead of interest on their deposits at the central bank, the Islamic banks will receive a share of profits from a fund of “sukuks”. The central bank manages the pool for the commercial banks. This is known in Islamic banking as a “wakala” contract. Currently, the Islamic banks in Britain hold their excess liquidity mostly as interest-free cash holdings.

Al Rayan Bank will particularly benefit from the new facility, Moody’s said in a comment. This supports the rating outlook of the largest Islamic bank in Britain, which is the only one with an official rating. Al Rayan, founded in 2004 as the Islamic Bank of Britain, with headquarters in Birmingham and London, has a balance sheet value of over £ 2.2 billion. It has a market share of more than 40 percent in Islamic banking on the island and, according to its own information, has more than 90,000 customers. One of its branches is in the posh London district of Knightsbridge across from the luxury department store Harrods. For several years now, Al Rayan has belonged to a Qatari state-owned bank and the Qatar state fund. In 2018, it issued the UK’s first Shariah-compliant bond backed by home mortgages. These are formally designed as house building investments.

However, Al Rayan not only attracted attention with its relatively attractive account conditions and cheap home construction financing. In the past year, connections to Islamist associations and even organizations suspected of terrorism also hit the headlines. Research by the “Times” revealed that organizations such as HHUGS, which supports the families of terrorist suspects in the Middle East, or the Finsbury Park Mosque in London with links to Hamas have accounts with Al Rayan, while other institutes have refused to do business with them. Conservative MPs called on Qatar and Al Rayan Bank to stop supporting Islamist organizations. The bank denied the allegations.


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