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In conversation with Omar Shaikh, Managing Director of the UK Islamic Finance Council

Updated: Oct 19, 2021

Omar Shaikh is a widely respected authority in Islamic and ethical finance. As managing director and advisory board member of the Islamic Financial Council UK (UKIFC) and co-founder the Global Ethical Finance Initiative (GEFI), he has been at the helm of promoting and enhancing the global Islamic and ethical finance industry. A Chartered Accountant by profession, he has advised and trained multiple financial institutions and governments on their regulatory frameworks and business strategy for Islamic finance for more than two decades.

Within ethical finance, Shaikh has pioneered the award-winning Edinburgh Ethical Finance Round Table series, which led to the inception of the Ethical Finance Hub and attracted large international ethical finance events to Scotland. He also led the development of the Edinburgh Finance Declaration, the world’s first joint venture between Islamic finance and the Church, promoted to more than five million people worldwide.

In 2015, Shaikh co-founded GEFI, which annually convenes international stakeholders in Edinburgh seeking to use finance for positive change. GEFI recently launched the Path to COP26 campaign, bringing together stakeholders to advance climate finance ahead of the 2021 Glasgow summit.

In this exclusive interview with Crescent Leaders, Shaikh discusses the opportunity for the global Islamic finance industry to massively increase its profitability and market size by playing a more strategic role in ethical and sustainable finance. He also shares his thoughts on the value that Islamic finance can bring to the ESG table and vice versa.

You have served on various UK Government and Mansion House initiatives for promoting London as the Western Hub for Islamic finance. What progress has been made in the UK’s Islamic finance industry over the last decade and what gaps remain?

The UK Islamic finance market is a critical jurisdiction for the global Islamic finance industry, but also a proxy and a benchmark for many western financial markets that may have Muslim-minority populations or are important financial centres. London has always been important to the global financial services world because of its position as a financial services hub. We have multiple sukuk listed in London and we continue to provide liquidity management tools for global Islamic banks using the London Metal Exchange.

Recent progress shows mixed signals. On the positive, we’ve seen Gatehouse Bank enter into the domestic mortgage market, we’ve seen the reissuance of the UK government’s sovereign sukuk, and the Bank of England (BoE) have furthered their commitment towards making a liquidity management tool. We’ve also seen strategic initiatives such as the Global Islamic Finance and UN SGDs Taskforce being launched out of the UK, and the UKIFC played a key role in that. In addition, the fintech space in the UK is quite well advanced and within that arena, we’ve seen interesting Islamic finance start-ups. Furthermore, Al Rayan Bank, issued the world’s first mortgage-backed GBP sukuk about four years ago.

However, some challenges still remain. The UK retail Islamic finance market still presents a limited portfolio of products. We lack products such as asset financing and car financing, for which there is pent-up demand which I feel is under-served. The commitment the government had made towards Islamic student loans has not been met as yet. Whilst the bank of England did come forward with a plan to put together a liquidity management tool, as far as I’m aware it still hasn’t been activated.

So, there are limitations and some concerns over retail retrenchment and unfulfilled government promises. Above and beyond that, we haven’t seen a huge number of corporate/private sector domestic sukuk issuances coming through. We have international ones listed on the London Stock Exchange, but domestic GBP denominate issuances are still limited.

What about Shariah-compliant pension schemes in the UK?

There are limited options in the pensions space. To craft a meaningful pension portfolio, you need to have the full spectrum of asset classes, including equity and fixed income. Sterling-dominated fixed income, that is sukuk, is so limited that it’s problematic to construct a competitive pension portfolio in a balanced, liquid way that is line with the regulatory requirements as well. There are Islamic equity funds out there. One of the more leading fintech players is Wahed Invest, they are U.S. headquartered but they’ve also set up in the UK and they’ve put together a fantastic robo-advisor type of platform for people to invest and I believe it can be used in the pension and ISA structures. NEST and OptionsPensions are also providing solutions within the confines noted.

How would you describe the current situation with regards to Shariah investors from abroad investing in the UK?

I would address this through two lenses. Traditionally, Shariah investors have invested heavily in the UK, primarily in the real estate asset class. Real estate over recent periods continues to demonstrate strong growth particularly in the north of England and other areas. Historically, high-profile real estate assets have been acquired including The Shard and parts of iconic buildings in central London. Strong yields have also been achieved by shariah compliant investors investing in student housing. This has been happening traditionally and we expect that to continue.

In addition, when it comes to investors from abroad investing in the UK, we’ve seen increased interest in working with UK-based global asset managers who are managing their investments across global capital markets through London. These includes global equity funds. We expect that trend to continue and with the interesting addition of strong ESG credentials incorporated in the investment strategy. Recently, we’ve seen examples of developments from asset managers such as Schroders, who have issued Shariah-compliant funds.

These are the two perspectives from which we’re seeing overseas investors brining money into the UK in a Shariah-compliant way – real estate, along with the periodic direct private equity investment and more generically through the global asset managers based in London.

Where does Islamic finance fit today within the global ethical finance marketplace? And to what extent can ESG factors broaden the appeal of Islamic finance?

This area has been of particular interest for us at UKIFC for over a decade. Faith-based finance be it Islamic or Abrahamic is a subset of the broader ethical finance universe. In Britain the role of faith-based finance has been key in the ethical finance movement. We have always said that Islamic finance is a form of Abrahamic finance, sharing many values with Abrahamic traditions, and as such the ban on Riba is not Islamic; it was introduced over 600 years before Islam even started.

What’s really interesting is whilst many Islamic finance experts have been talking about it and saying that Islamic finance is very ethical and has a broad appeal, there were few people listening and very few actors within the Islamic finance industry genuinely putting in smart, strategic, and tactical positions to capture that market opportunity. Islamic banking is worth $2.7 trillion roughly. The global market for sustainable investing, if we take one benchmark of ethical finance – people signed up to the Principles for Responsible Investment (PRI) launched by the UN over a decade ago – that’s $81 trillion of capital.

What we’ve seen, which is absolutely fascinating – and we’re very unique in our proprietary insights because we’re involved across two organisations, UKIFC and GEFI which is focused on mainstream ethical finance – is the turning of the tide, where mainstream financial institutions can now no longer be seen to be doing nothing in the space of sustainable or responsible finance.

This change has happened in the last two and a half years. Previously in the late 90s and early 2000s, ethical finance was seen as something just for the people of faith, the “tree huggers”, and the “hippies”, and as something that didn’t work. Then along came the global financial crisis, where we realized that the current system doesn’t work either. The world of banking and finance had got itself into a big mess and comments such a that of Lord Adair Turner, who was chairman of the UK’s Financial Services Authority at the time, stating that much of banking was “socially useless” were resonating hugely.

This last decade has been a decade of repair work from the global financial crisis but there’s also been a huge increase in consciousness in the mainstream space. People are now talking about profit and purpose, which is a language we haven’t in recent decades. Paul Polman, former CEO of Unilever, did amazing work to initiate this conversation. Today you’ve got companies in renewable energy or fairtrade clothing, etc. and such initiatives have absolutely rocketed in their prominence and profitability, as they resonate with the current consumer and investor market climate.

Capitalism is changing from shareholder primacy to stakeholder primacy, where we’re looking at a broader form of capitalism underpinned by profit and purpose, something that matters to all of society. The ongoing challenges, such as climate change, covid-recovery and global poverty, have all been accentuated by social media, where visibility and knowledge are a lot more common. People have started to question ‘Where is our money? How is it being used? Is it line with our values?” These are questions that are being asked within the mainstream, agnostic secular space – not just within Islamic finance.

Therefore the ESG, sustainable, impact arenas are booming. We’ve got the emergence of the $715bn+ impact investing market, the Principles of Responsible Banking (PRB) following in the footsteps of PRI and regulators coming forward with Task Force on Climate-Related Financial Disclosures (TCFD), but also, we’ve had the emergence of the UN SDGs five years ago, which have been adopted by the private sector. Many financial institutions in the private sector are now aligning with the SDGs and it’s fast become the umbrella and benchmark for measuring impact.

All of these developments indicate there’s huge recalibration of the type of finance that we have today. Asset managers cannot get a mandate from an asset owner without answering a checklist of questions, directly associated with their ESG and sustainability credentials. And that’s a challenge, because how do you measure the ‘S’ in the ESG; that’s not easy. How do you decarbonize your loan-book if you’re one of the largest banks in the UK for instance?

Having been involved for over a decade, I feel there has been an absolute seismic change in the mainstream ethical finance world. Before it was nice to do, it was corporate social responsibility, a bit of marketing and greenwashing. Now, it has become front and centre, a top priority. While all of this is happening in the mainstream, Islamic finance is still similar, sitting around $3 trillion, focused on select markets. Where is this interaction? Our insight at the UKIFC is that Islamic finance has the opportunity to be playing a much more strategic and tactical role in the mainstream markets, which can massively increase its profitability and addressable market size, but also can help the industry overcome its own inherent challenges ad creeping cynicism around letter of the law versus spirit of the law within contemporary Islamic products.

The reality is Islamic finance is very small. And you can argue it’s a follower not a leader, in that the majority of what we developed in the Islamic finance market was to replicate existing conventional products to make an Islamic alternative. Thus for mortgage we made home purchase plan and for bonds, we made sukuk. You can argue that this is the establishment phase it went through of adaptation. You’ve got to give a lot of credit and appreciate the early fore-founders of the Islamic finance industry who managed to create an alternative for Muslims that is Riba free. That’s not easy to do, so it’s commendable. Now the question is, what’s the next journey that the industry wants to take?

We have the opportunity to innovate and move beyond compliance (i.e. halal), and to make it ‘Tayyib’. Tayyib is more wholesome, i.e. if you take everything which is shariah compliant and then add on progressive ESG stratgies and impact investing, all of a sudden, you’ve got a great new quality product which is both ESG and shariah compliant, that appeals to a much broader audience. That’s what I call it Tayyib.

According to the “Islamic Finance and the Principles for Responsible Banking” report launched in June 2021 [by UKIFC in partnership with the Malaysia-based International Shari’ah Research Academy for Islamic Finance (ISRA) and GEFI], 49 of the 57 OIC countries do not contain any PFB signatory organisations. Why do you think this is the case? What would encourage more organisations in OIC countries to sign the PRB declaration?

Islamic finance has the opportunity to be involved the mainstream ethical finance movement. But to do that, I also think the mainstream ethical finance movement, whether that’s the UN PRB, PRI, or SDGs, need to do more to talk to the Islamic finance world. Because Islamic finance has unique contemporary experiences which can genuinely inform and guide them. It took us seven years, but we figured that out. Some of these features are ringfencing the use of proceeds or having a shariah supervisory board; that’s not a common feature within a conventional bank. You have a specialist board that looks at social and ethical parameters, because that’s ultimately what the shariah board does and ensures that the finance and operations are in line with religious teachings. That’s a new concept for financial institutions. How does it work? What level of authority do they have? How do you deal with inconsistencies? All of that the Islamic finance industry has successfully learnt to deal with over the last 30 years.

Global standard setting bodies haven’t taken the opportunity to engage with and learn from the experience of Islamic finance. And the Islamic finance industry has lived in parallel but has also been guilty of assumed compliance. Many actors in Islamic finance think ‘we’re shariah compliant’ therefore we’re the ‘best of the best’ by default. “Don’t tell us about ethical finance, let us tell you about ethical finance, because we have the best model, it’s shariah compliant and we know what we’re doing”.

There’s a bit of a risk there, because you can end up in this area of assumed compliance, where you think you’re already in line with the PRB, PRI, TCFD, or Green Bond Principles (GBP). But actually, you’re not in line as Islamic finance has largely limited it’s engagement primarily to the legal structures of the financial products. I can issue a sukuk which is shariah compliant, and the proceeds of the sukuk can be use to cut down trees, which results in deforestation. Or I can be a halal company that makes jumpers, but the Shariah board is not looking into my supply chain to see if I’ve got child labour in my manufacturing process. So, there are parameters we haven’t fully focused on, such as climate and biodiversity, and components of supply chain.

That’s where the SDGs come in, by giving a great benchmark that you can align against. There’s probably a 95 percent alignment between the SDGs and the Shariah or Maqasid. There will be one or two differences, primarily around the definition of the family unit, gender etc. Aside from that, there’s not much difference, and that’s something we can deal with it, each to their own. Otherwise, life on land, life below water, poverty, gender equality; all of these factors are applicable. We can work very well in that space. Global institutions could’ve done more to engage, and they would’ve learnt a lot, whilst similarly Islamic finance institutions need to realise their global responsibly and also engage better for all of humanity. If Islamic finance can do that well, they would’ve realised that they could’ve positioned their product to have an appeal to a $100 trillion market not a $3 trillion market.

How easy is it nowadays for Islamic banks to incorporate ESG and sustainable practices more fully into their risk assessment process?

Islamic banks, because of their DNA and their existing Shariah compliant structures, should be a lot more comfortable with putting in place the necessary additional structures and operational requirements. They have to be very cautious that the Shariah scholars do not necessarily think they have all the skillsets to do this. They are not carbon experts for example, they will not be able to give you data around carbon emissions, nor will they be able to question, challenge, or process data on Scope Two or Scope Three emissions and present that in line with regulatory disclosure requirements under TCFD. So [Islamic banks] have to be cautious not to have expectations from the shariah scholars to do that.

But I do think there is potentially a role for shariah scholars and shariah governance structures to support the bank’s journey in the ESG space, particularly when you look at the ‘S’ in ESG. How do you measure social issues and social justice? That’s something which the training of shariah scholars makes them very well positioned to contribute to this conversation.

Conventional banks do not have the benefit of shariah supervisory boards and internal shariah compliance units; for them to identity how to deal with the S in the ESG can be much harder. The E is environmental, which is data around carbon, and it’s a lot more developed, you can bring in the technical experts for that. Environmental factors are widening out to cover biodiversity loss, an area that’s a bit more novel. The S is where Islamic banks have that advantage with the shariah scholars.

Some investment brokers suggest that ESG funds come at a slight premium compared to their traditional counterparts due to the extra levels of due diligence involved. Is this a misconception? If not, can the higher fees be justified to investors?

We heard that exact same challenge to Islamic banking 25 years ago. To put in the shariah scholar fees and the additional lawyer fees, Islamic finance comes at a premium, and there’s a competitive disadvantage and so on. The beauty of Islamic finance is that we have matured as an industry and dealt with that issue very well. If you just take the journey of Islamic banking over the last 25 years, that same concern was there – you have to pay extra marketing, education, awareness, shariah scholars, internal shariah compliance units, then the lawyers because you need to restructure all the legal documents.

They said that no one was going to pay the extra fees. Well guess what, they did. And we moved from a few billion to a three trillion-dollar industry. So, we’ve got unique insight, maturity, and wisdom in understanding and navigating such challenges. They might seem right from an intuitive perspective, but in reality, they don’t necessarily play out that way. The demand is considerably high; the expectation for such products is very much there. It’s not as simple as there are extra costs and therefore it’s not going to work. We actually dealt with that question in Islamic finance many years ago and we successfully addressed it. When there’s fundamental market demand more players crowd in and the costs go down and level out. If that’s what the customers want, then that’s what they’ll pay for, because they’re looking for not just price but also for quality service and alignment with their values.

In late 2020, the UKIFC launched a high-level international taskforce to engage the Islamic finance industry with the SDGs, with an action-oriented program set to run until 2022. Can you tell us about some of the milestones achieved by this taskforce?

We launched this taskforce to help promote the understanding of the SDGs within the commercial Islamic finance market. Some people thought SDGs are exclusively for governments and non-profits or the world of social Islamic finance such as zakat and waqf. Actually, SDGs equally apply to the commercial world. That’s why Schroders and others have massive programs to align their existing investment funds with the SDGs. That’s why HSBC Amanah issued the world’s first SDG sukuk; and why Hermes have got an SDG equity fund.

Of course, Covid hit, and that impacted everyone’s activities over the last 18 months. We created the taskforce and had a fantastic launch with the UK Economic Secretary to the Treasury and City Minister, John Glen, and the former president of the Islamic Development Bank, Dr. Bandar Hajjar. The subsequent session was hosted by the State bank of Pakistan and its governor Dr. Reza Baqir, so the initiative was very well welcomed.

We’ve got 40-plus global top tier executives, CEOs, and senior leaders from across Islamic financial institutions from around the world actively involved. Our work has directly led to Islamic banks signing up to the PRB, and right now, the taskforce has three key working groups. One is a country group, the Pakistan working group, which is working diligently with around 15 of the biggest banks in the country, both Islamic and conventional. We’ve done a huge amount of work to build their knowledge and understanding of the PRB and helping them further their green finance regulatory framework. This is a great example where Islamic banking has brought a global agenda to a country’s banking ecosystem. We’re working on a comprehensive Pakistan country report now that states the lay of the land with regards to sustainability and the banking sector. Pakistan is the fifth most populous country in the world, but it does not have a single bank signed up to the PRB.

Another exciting initiative is that we’re hosting a virtual summit during the UN General Assembly at the end of this month. At this summit, we’ll be launching a couple of reports, one of which is a PRB guidance note on disclosures specific for Islamic banks. The other is shariah perspectives on the SDGs.

The next meeting of the taskforce will be held at COP26 later this year at Glasgow, and it will be an in-person meeting. It’s great that the climate summit is coming to our home here in Scotland.

We’re also planning the world’s largest Islamic finance survey. It will be going to all the banks and financial institutions which are represented on the taskforce. They will be reaching out to their customers across the UK, Nigeria, Kenya, GCC, Pakistan, Bangladesh, Malaysia and other countries, and they will be doing a global survey with the same questions on sustainability. The goal is to genuinely explore and understand the retail appetite and expectations around sustainability. What do customers expect from their Islamic banks? How important is it as a product for the retail audience? We realized that by putting this survey through to all of the customers of our members, it will go out to millions. So, we’re really excited to see how this will pan out. It could really help banks to change their strategies.

Finally, what are your plans for 2022? What are you looking forward to the most?

We’re excited about this year’s COP; together with GEFI and we’re running the Faith in Finance workstream. We’re also launching a high-level working group on green sukuk because we see that as a big area for development with over $30bn+ of potential over the coming years.

Next year We’re looking forward to the survey results coming through and getting a couple of the banks in Pakistan to sign up for the PRB.

We think that the sustainability agenda is only going to double year on year, it’s going to see exponential growth. The amount of interest we’ve seen has been phenomenal. I suspect we’re going to see big mainstream players coming into the ethical and Islamic equity space with sizable funds being launched. We’re doing some exciting work with the Global Impact Invest Network, one of the main industry development bodies for impact investing. Next year I’m excited to see the journey progress towards developing an ecosystem of Tayyib products. I see that as the big opportunity for 2022, to take that first formal step for the Islamic finance industry to further its offering together combing the best of shariah compliance with authentic marker leading ESG strategies, or as we call it, Tayyib.

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