The Growth of Islamic Finance in the UK

As the global financial landscape continues to evolve, the UK Islamic finance market has emerged as a dynamic and integral component of the broader financial ecosystem.

The UK Islamic finance market has witnessed significant growth over the past decade, driven by increasing demand for Sharia-compliant financial products and the UK’s strategic positioning as a leading hub for Islamic finance outside the Muslim-majority countries. The UK now hosts five fully fledged Islamic banks and over 20 conventional banks offering Islamic financial products. According to the UK Islamic Finance Secretariat (UKIFS), the Islamic finance sector in the UK is valued in excess of GBP6 billion with figures set to double in the coming years, a testament to its robust expansion and growing appeal.

Regulatory and legislative enhancements have played a crucial role in fostering the growth of the UK Islamic finance market, and continue to evolve to maintain the UK’s position at the forefront of creating equality of access across the financial markets.

When the Bank of England established a Sharia-compliant liquidity facility, known as the Alternative Liquidity Facility (ALF) in December 2021, it became the first Western central bank to offer a non-interest-based deposit facility. The ALF has provided Islamic banks with greater flexibility in managing their liquidity needs. This was an important step in providing a level playing field for Sharia-compliant Banks and enabling greater flexibility in meeting regulatory requirements under Basel III prudential rules, and the Bank of England’s data shows that it is in regular use.

The Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA) have, likewise, been actively engaging with industry stakeholders to ensure that the regulatory framework supports the unique characteristics of Islamic finance. In 2022, the FCA introduced new guidelines for Sharia-compliant crowdfunding platforms, providing greater clarity and confidence for investors and issuers alike. In December 2023, the FCA set out proposals for adjustments to its authorised funds rules in a number of areas. As part of those adjustments, Sharia-compliant funds may now make payments for Sharia compliance purposes to registered charities out of scheme property.

In January 2024, the government issued a consultation paper on “Tax Simplification for Alternative Finance”. The consultation sought views from the industry on a legislative change that would ensure that, where certain conditions are met, a person obtaining “alternative” financing was not disadvantaged from a tax perspective. This consultation paper focused predominantly on the impact of Capital Gains Tax (CGT) on purchasers in the Sharia-compliant residential property and buy-to-let markets. Legislation was subsequently introduced in the recent Finance Bill (2024‒25) amending various existing tax laws to provide that where a person wishes to use alternative finance to raise capital using an asset they already own, a tax charge will not arise. Terminology here as to “alternative finance” has been intentionally inclusive but the Sharia-compliant sector is the biggest beneficiary of these changes.

The UK’s latest project with cross-parliamentary and industry support in the continuance of equality of access to financing is in relation to student loans. Alternative Student Finance (ASF) is designed to provide a Sharia-compliant alternative to traditional interest-bearing student loans. ASF is intended to cover tuition fees and living costs for eligible higher education courses, much like conventional student loans. Instead of charging interest, it uses a model based on the Islamic finance principle of Takaful or “mutual guarantee”. Students receive payments to support their education whilst guaranteeing to repay amounts in the future once their income reaches the relevant agreed upon threshold. This means ASF repayments will be based solely on what people earn, like the existing loan-based system. The repayment amounts are calculated to ensure that students using ASF repay the same amount they would have under the existing loan-based system. The authors understand that the government is committed to implementing this as soon as possible.

These developments (and others) have been widely lauded by market participants and have solidified the view of the UK’s position as not only a leading centre for Sharia-compliant corporate finance but also as an environment for inclusive access to finance for Sharia-compliant communities.

Current Trends in the UK Islamic Finance Debt Market

Sukuk issuance

The London Stock Exchange is, according to Fitch Ratings, the third-largest listing venue for US dollar Sukuk globally, with 35% global share and around USD80 billion outstanding at end-1H24 (end of the first half of 2024). With English law consistently being the prevailing governing law for most dollar Sukuk and Islamic syndications globally, UK banks are among the key Sukuk arrangers, with Islamic interbank and derivatives counterparts for Islamic banks. Additionally, the London Metals Exchange remains a key player being accessed by various counterparties and Islamic banks globally to facilitate the purchase and sale of metals to generate cash financing through commodity Murabaha contracts.

The increasing trend of green and sustainable Sukuk is particularly noteworthy, as investors seek to align their investments with environmental, social and governance (ESG) principles.

Expansion of Islamic retail banking

The expansion of Islamic retail banking is another significant trend driving the UK Islamic finance market. Islamic retail banks in the UK have been actively developing innovative products tailored to meet the needs of a diverse and growing customer base. From Sharia-compliant mortgages to investment funds, these products cater to the ethical and religious considerations of Muslim and non-Muslim clients alike.

According to the Islamic Finance Council UK (IFCUK), the number of Islamic retail banking customers in the UK has grown by 20% annually over the past five years. This growth is fuelled by increasing awareness of Islamic finance principles and the competitive advantages offered by Sharia-compliant products alongside the levelling of the regulatory and legislative playing field giving greater access around property purchase, mortgaging and lending to the retail customer base.

Integration of fintech in Islamic finance

The integration of financial technology (“fintech”) into Islamic finance is revolutionising the way financial services are delivered. Fintech solutions are enhancing the accessibility, efficiency and transparency of Islamic financial products, thereby attracting a broader customer base. The UK, being home to a significant Muslim population and a well-established financial ecosystem, has quickly become a hub for a vibrant fintech ecosystem, and the UK is now at the forefront of this fintech transformation.

Innovative platforms offering peer-to-peer (P2P) lending, crowdfunding and digital banking services have gained traction with fintech companies offering innovative and ethical investment solutions that adhere to Sharia principles.

The development of the double Wa’ad structure in the Islamic repo market

Repurchase transactions (“repos”) are financial instruments that facilitate short-term funding and liquidity through the sale and subsequent repurchase of securities. Repos are accordingly important tools for market stability and efficient cash flow management. While in conventional financial markets, repos are commonly used as a means of borrowing and lending money, in Islamic finance conventional repos are generally considered to be Haram (forbidden) because, for example, a conventional repo involves the sale and repurchase of a security at a predetermined future date for a set amount, which is considered Riba (interest or usury) and is prohibited in Islamic finance.

The Islamic repo market accordingly developed using the Murabaha structure. Murabaha is a cost-plus financing structure where the financier buys Sharia-compliant assets (usually metals) from a third-party supplier at cost price with immediate delivery and payment (see Repos in Islamic Finance). The financier then sells these assets to the financed party at a marked-up price with immediate delivery and deferred payment terms with the profit margin disclosed (see Repos in Islamic Finance). The financed party then sells the assets at cost price to a pre-determined third-party purchaser.

The widespread use of Murabaha structures for Islamic repos led the International Islamic Financial Market (IIFM) to publish the Master Collateralized Murabaha Agreement (MCMA) in 2014 (Master Collateralized Murabaha Agreement (MCMA) – International Islamic Financial Market; Repos in Islamic Finance – 2). The MCMA, similar to the Global Master Repurchase Agreement, is a master agreement with standard provisions for the Islamic repo market. Each Murabaha contract under the MCMA constitutes a collateralised Murabaha transaction, providing access to liquidity using collateral Sukuk and other Sharia-compliant securities.

An alternative and developing form of Islamic repo is the double Wa’ad structure, which includes a mutual undertaking between parties to enter into a Murabaha transaction. The arrangement has an initial sale of securities by the seller to the buyer at a pre-agreed price. The seller also grants a Wa’ad to the buyer, undertaking to repurchase equivalent securities at a future date for an agreed price (the “first Wa’ad”). Simultaneously, the buyer grants a Wa’ad to the seller, committing to sell equivalent securities back at a future date (the “second Wa’ad”). Upon exercise of the relevant undertaking, the parties will exchange the repurchase price and equivalent securities. Thus, Murabaha repos require more documentation and present higher complexities than the double Wa’ad structure, making the latter a helpful innovation in the developing market. Additionally, where the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) standards apply, trading repos in Murabaha format may not be preferred.

The double Wa’ad structure underscores the innovative strides in Islamic finance to balance religious adherence and financial objectives and provide financial institutions in the UK and internationally with further liquidity options.

Strategic collaborations

Strategic collaborations have been pivotal in driving the growth and development of the UK Islamic finance debt markets with notable collaborations between UK-based financial institutions and their counterparts in the Middle East and Southeast Asia. Recent developments in the wider, global, Islamic finance markets will undoubtedly impact the UK market and, as we see the developments of new structures and legislation overseas, the authors foresee opportunity for UK institutions in these markets. One relevant example is the recent publication of close-out netting legislation in the Kingdom of Saudi Arabia.

On 12 May 2025, the Kingdom of Saudi Arabia introduced new regulations to enforce close-out netting arrangements, aligning its laws with international standards to boost domestic banking and financial market competitiveness and liquidity. This development addresses previous legal uncertainties affecting over-the-counter derivatives, repos, and stock loans. Inspired by the International Swaps and Derivatives Association’s 2018 Model Netting Act, the framework ensures enforceability of close-out netting arrangements even in bankruptcy, providing strong insolvency protection. Comprising the Saudi Central Bank (SAMA) and Capital Market Authority (CMA) Netting Regulations, these regulations apply to qualified financial contracts (QFCs) involving at least one SAMA- or CMA-regulated party and include Sharia-compliant trades and multi-branch netting.

This move is expected to enhance trading volumes, liquidity, and Saudi Arabia’s status as a regional financial hub, offering UK financial institutions reduced credit risk and capital requirements for transactions with these counterparties.