time
While Islamic leasing in western Europe is far from mainstream,
it is gaining ground
Go deeper with GlobalData
Access deeper industry intelligence
Experience unmatched clarity with a single platform that combines unique data, AI, and human expertise.
With the domestic banking market on the rocks, it is high time
that we should all be paying more attention to alternative funding
solutions. As a result of increasing numbers of institutions that
provide Sharia compliant financing, not only those specialising in
Islamic finance but also mainstream banks offering similar products
and services, not to mention Government tax initiatives to level
the playing field for alternative finance arrangements, Islamic
finance has become more competitive than ever.
Perhaps what has been attracting more global attention than any
other product is the sukuk, which are Sharia compliant bonds and
therefore do not involve the payment or charging of interest.
Recently, as a result of new UK tax rules, they have been given
the same tax treatment as conventional bonds. This development has
removed fiscal detriments the sukuk suffered previously, and made
them more attractive to mainstream investors. This is part of the
UK government’s strategy of staying competitive in the Islamic
finance sector, both at home and abroad, and also maintaining its
position as a western global gateway in this sector. The government
is also keen to tap into Britain’s two million strong Muslim
population.
In addition, a government white paper, due to come out later
this year, is expected to herald a ‘Sovereign Sukuk’ aimed at
attracting all investors, not just muslim ones. Saleem Malik, an
Islamic Finance expert at Berwin Leighton Paisner (BLP), says:
“This may trigger renewed interest in Islamic Finance, and if
successful it will act as an accelerator in acceptability.”
US Tariffs are shifting - will you react or anticipate?
Don’t let policy changes catch you off guard. Stay proactive with real-time data and expert analysis.
By GlobalDataIslamic leasing
These new rules are not expected to impact much on Islamic
leasing. Andrew Baird, a partner at BLP, says: “Leasing in Islamic
finance is a quiet revolution and hasn’t required much assistance
from the government, and is also easily done within the framework
of UK law and UK tax law.” Although there are differences between
conventional leasing and Islamic Leasing, they remain relatively
insignificant.
Ijara – typically sale and leaseback-type transactions – remains
popular in asset finance. However, there has been a marked increase
in the use and acceptance of murabaha-type financing, a form of
leasing in which a lender purchases an asset, re-sells it at an
agreed higher price to the user, payable to the lender over agreed
instalments. No interest is charged in this transaction. This is
particularly popular in ship leasing deals where the use of simple
sale and leaseback arrangements can raise difficult legal
questions.
A brief look at some of the deals indicates how popular some
products are becoming. Earlier this year the Bahrian-based Arab
Banking Corporation launched a $100 million syndicated revolving
murabaha financing facility for a Kuwaiti company, the
International Leasing and Investment Company, which was
oversubscribed by 50 per cent.
It appears also that the size of Islamic finance deals are
growing. Baird says: “A few years ago, it would have been very
difficult to put together a syndicate of this size and complexity,
and it also would have been very difficult to find a non-GCC bank
in the syndicate.” By way of example, he points to two large recent
transactions, involving the National Shipping Company of Saudi
Arabia and a subsidiary company called the National Chemical
Carriers Ltd, for the refinancing of existing conventional
facilities and the financing of new carriers.
Benefits of using Islamic finance
While to date lessees and other end users in Europe have made
less use of Islamic financing than their Middle Eastern
counterparts, it has proven to be a useful alternative finance
source when credit lines are exhausted for example. This
explains why these types of deals are sought by a growing number of
Islamic financial institutions, including the European Islamic
Investment Bank, and Bank of London in the Middle East, but also
many mainstream banks such as Lloyds, HSBC, the Royal Bank of
Scotland and CitiBank, which together provide a wide range of
funding sources for those seeking Sharia compliant services both
personally and commercially.
As this market has matured, high fee costs which used to be
associated with Islamic financing are dropping. Also, the market
has shown a greater degree of parity in pricing than previously as
they are not only competing between themselves, but also
conventional banks in the market.
Another significant area of growth involves Islamic funds
seeking European assets to invest in. Although this is
predominantly in real estate, there has been substantial investment
in movable assets.
Baird says: “All the regional players in the Gulf states are
very interested in looking into investing in European assets,
particularly public sector style assets where the returns will not
be as fantastic as they are in real estate, but effectively where
you will have a government credit.
He added: “For example, where you have seen transaction
facilitation insurance (TFI) products (which insure against
obstacles that arise during a transaction) financed on a bond basis
you will start seeing an alternative funding source come in. This
is attractive to the investors, because it’s an investment of an
outside demeanour for the Gulf investors and it is in fairly solid
assets. Also, as they are in the public sector, it is likely
to be used for a good purpose.”
However barriers still exist. Not all structures are catered for
under UK tax law, and more provisions for the equal treatment of
Sharia compliant products to cover more complex structures are
needed. Charles Goddard, a partner at BLP, says: “The market is
becoming more sophisticated, so tax law is taking a while to catch
up.”
Malik explains another barrier to the growth of Islamic finance:
“There is a lack of a secondary market. The distribution of the
products is challenging not only because of a reluctance of
conventional players to participate, but also the structuring as to
how to sell down the product may be different.”
Despite these barriers, Islamic finance has seen unprecedented
growth facilitated by governments keen to participate in a dynamic
sector. The increasingly competitive market is providing wider
funding options for an ever expanding target audience, reaching
Islamic and non-Islamic businesses alike.
