Why study Islamic Finance within the UK?
Simon Archer, Visiting Professor, ICMA CentreHenley Business School, University of Reading
The rapid growth of Islamic finance, in the Middle East and South East Asia, and increasingly in other regions including Western Europe, has created a substantial need for well-trained middle managers in Islamic financial institutions which is far from being met at the present time. Those trained in conventional finance need to be able to understand not just the technical differences between conventional and Islamic financial transactions and institutions, but also the nature and import of the Islamic religious obligations which give rise to these differences. There is also a need for opportunities for postgraduates who envisage pursuing a career as managers of Islamic financial institutions to have access to educational programmes at the postgraduate level which combine conventional and Islamic finance.
The UK offers such opportunities, as several UK universities provide such programmes. For example, the ICMA Centre at the Henley Business School, University of Reading offers an MSc programme in Investment Banking and Islamic Finance, in conjunction with the International Centre for Education in Islamic Finance (INCEIF) in Kuala Lumpur. The UK is well known for its provision of high quality postgraduate education which attracts a large number of international students. In addition, the UK, with its substantial number of Muslim citizens, an increasing number of whom are occupying prominent positions in society, is active in the provision of Islamic financial services. Islamic investment banks based in or active in London include the Bank of London and the Middle East (BLME), the European Islamic Investment Bank (EIIB), Gatehouse Bank and Arcapita, while the Islamic Bank of Britain provides retail banking services and Principle Insurance is an Islamic insurance (takaful) company. A number of other Islamic financial institutions are planning to set up operations in London. In fact, the UK aims to be a global hub for Islamic finance. The present woes of the conventional financial services industry internationally serve to enhance further the attractions of Islamic finance in terms of career prospects. While many conventional financial institutions, as well as major auditing and consultancy firms, are freezing recruitment and in some cases paying recruits to take a year out before starting their employment, Islamic financial institutions in the UK, while still small, are growing.
One of the main characteristics of Islamic financial institutions is that they may neither pay nor receive interest. When funds are deposited in an Islamic bank, this may be in either a non-interest-paying current account, or in an Islamic investment account. In the case of the latter, the depositor (or, more accurately, the investor) receives the return on the assets in which the funds are invested, after deduction of a management fee payable to the bank. If the return is negative – a loss – the investor is required by Islamic principles to accept this loss (unless the bank has been guilty of negligence or of more serious misconduct). This poses a particular problem for Islamic retail banking in the UK, since the Financial Services Authority (FSA) will not licence an Islamic bank unless such investment accounts are ‘capital certain’ like conventional deposits, that is, the bank will make good any such losses. In the case of the Islamic Bank of Britain, the bank will make good any losses on investment accounts, except that an investor may accept the loss for religious reasons. Apart from this, the return to the investor depends on the returns on the underlying assets. Asset management skills, taking account of the prohibition of interest, are thus particularly crucial in Islamic banking. Islamic investment banks, with their private equity and wealth management activities, largely avoid the regulatory problem facing retail banks. This may help to explain why most of the Islamic banks that have started operations in the UK are investment banks. The MSc programme in Investment Banking and Islamic Finance offered by the ICMA Centre has been designed with this in mind.
There are also career opportunities in Islamic insurance (Takaful). The word ‘takaful’ means ‘solidarity’, and Islamic insurance, as well as avoiding interest received or paid, needs to carry out underwriting on a mutual basis, as Islamic principles do not permit insurance cover to be sold by an insurer. In a mutual insurance undertaking, the policyholders mutually insure one another, so that there is no sale of insurance as in proprietary insurance where the insurance company sells insurance cover to the policyholders. Principle Insurance, already mentioned, concentrates on non-life (general and accident) insurance products. Islamic life insurance (known as Family Takaful) is well developed in Malaysia and there is undoubtedly scope for its development in the UK. One of the major challenges in Islamic finance (in both banking and insurance) is asset allocation, given that interest-bearing instruments are not permitted. While this has been a major factor in protecting Islamic financial institutions from the so-called ‘toxic’ assets, it is a particular problem when there is a requirement for income-producing liquid assets for liquidity management purposes. The Islamic Financial Services Board (IFSB) is a major international institution concerned with the development and prudential regulation of Islamic financial institutions throughout the world.
The IFSB has published a Technical Note on Issues in Strengthening Liquidity Management Offering Islamic Financial Services: The Development of Islamic Money Markets (available at www.ifsb.org). One of the keys to such developments is the issuance of Islamic investment certificates (sukuk) that can take the place of conventional interest-bearing government paper (such as Treasury Bills) and corporate bonds. Sukuk issuances require an appropriate underlying asset pool which produces an interest-free return. Leased property is typically used for this purpose, as the lease rentals constitute an interest-free income stream. Designing sukuk issuances represents interesting professional opportunities and challenges for Islamic investment bankers. Given its history of leadership in finance, one would expect London to play a leading role in such developments.
In short, Islamic finance is a rapidly growing and dynamic sector which offers very interesting career opportunities for postgraduates with the appropriate educational background. The UK can validly claim to be the best country in which to acquire such a background.
