With a supportive fiscal and regulatory framework backed by the Government and Bank of England, Islamic Finance has continued to grow across a range of Shariah-compliant investment products, from savings accounts to pension schemes, from investment funds to bonds.
Shariah-compliant investing meets criteria such as not paying or receiving interest, a restriction on investing in industries such gambling, alcohol and tobacco, and the sharing of profit and risks between the financial institution and consumer. Islamic finance strategies are accessible to all, providing a tool for investors to diversify their portfolios, and can bring an ethical lens to investment.
Islamic investment funds globally recorded 21 per cent annual growth to reach $122bn in 2020, according to data from Refinitiv. With retail investors increasing their focus on environmental, social and governance (ESG) considerations, and corporates stepping up efforts to meet the UN’s Sustainable Development Goals (SDGs), Islamic funds are increasingly being used as an alternative route to support sustainable investment. Islamic funds with sustainability mandates in equities and Sukuk grew in value by over 60 per cent in 2020.
Whilst a conventional bond is a debt instrument that pays an interest, a Sukuk is an Islamic financial certificate that is Shariah-compliant. Global Sukuk issuance set a record in 2020 totalling $172.1bn according to Refinitiv. This includes the growth of green and sustainability Sukuk - those with proceeds targeting ESG themes – which raised a total of $4.6bn in 2020.
More recently, the UK Government issued its second Sukuk, a £500m issue listed on London Stock Exchange in April this year. The Sukuk raised more than double that of the Government’s debut Sukuk in 2014, which was the first issued by a sovereign outside of the Islamic world.
Importantly, the issuance priced at the same level as the conventional 5-year UK Gilt, reflecting strong and diverse global investor demand and achieving value for the taxpayer. The Sukuk uses a well recognised structure and will be underpinned by rental income from a number of central government office properties which are owned by the Government.
Since the first listing on its markets in 2006, London Stock Exchange has become a leading Western hub for Sukuk issuance, welcoming more than 100 Sukuk raising a combined $66bn.
This highlights the ongoing commitment of the UK to support the development of Islamic Finance as an asset class, and the ability of the UK’s markets and financial ecosystem to support innovative and pioneering transactions.
Investors are increasing looking to passive strategies to boost their investments and diversify their portfolios. Exchange Traded Funds (ETFs), where a fund passively tracks its underlying index and is traded on exchange much like shares, are an efficient way to access thematic and ethical investment, offering diversification, liquidity and transparency.
There are four Shariah-compliant ETFs currently listed on London Stock Exchange. The funds provide access to Shariah-compliant companies globally, with mandates spanning the developed world and emerging markets. Funds linked to indexes, such as FTSE Russell’s Shariah Global Equity Index Series, also ease access to some of the largest and most liquid
Shariah-compliant companies and fixed income products globally. Over the past year, the FTSE IdealRatings Sukuk Index has demonstrated the resilience of the Sukuk secondary market, ending 2020 up 8.6 per cent, despite a dip in March 2020 as the Covid-19 pandemic caused turbulence in global financial markets.The diversity of London’s markets, its regulatory and tax framework, and access to deep pools of capital from global investors makes London a leading international financing centre for Islamic Finance.
As investors continually look to incorporate ethical and sustainable investment into their strategies, it is key to provide them with access to the opportunities that enable them to expand and diversify their portfolios.