Islamic Banking in European Union Countries

Islamic Banking In European Union Countries
Islamic banking is a relative young industry, with a high rate of growth, which in the last years
became a highly discussed subject, due to the challenges and opportunities that it brings. Due to
the fact, that in the last decade, the Islamic banking made its presence in the European Union
market, too, in this paper we try to describe the main features of the Islamic banking transactions
and to identify the challenges and opportunities that its brings.
Nowadays the banking industry continues to grow amid the challenges and opportunities that are
present in Europe. There are good reasons why Islamic banking in Europe is on the rise, starting
with the strength of the financial institutions that are based in Islamic countries.
Some Opportunities are-
Sound Banking Practices and Ethical Investments:
The Islamic banks have incredibly strong economic operations. They adhere to their no-interest
policy very strictly, and this principle is never violated. Additionally, banks follow stringent
guidelines and frequently work to prevent disruptions when it comes to sharing profit and loss.
Although Islamic banks target their products mainly to Muslims, they also try to gain clients
outside Islamic community, especially among middle- and upper-class individuals. The major
appeal of Islamic banking for non-Muslim clients is the ethical and socially responsible nature of
Islamic financial investments. In a survey conducted among 100 private bankers around the
world by the Economist Intelligence Unit in 2012, the surveyed said thatthey expected the annual
increase in the amount of money directed towards ethical investments by an average of 9,1% in
the following five years. And 25% of private bankers expected a double-digit annual percentage
increase in investments, which are sharia-compliant. The need to use ethical services is
especially strong among clients from the European Union, where the demand for such
investments especially grew in the aftermath of the global financial crisis of 2007-2009. The
crisis, which affected severely European financial industry, spared Islamic banks. Proponents of
the Islamic financial system even says the crisis would not have occurred if the Islamic
principles of finance had been implemented in international financial markets. There is no clear
evidence whether, it is indeed truth or maybe Islamic banks were more resilient to the crisis,
because of their immaturity. Still Islamic banks use this fact as a factor, which helps to build
their positive image.

Development of Islamic Banking in EUServices from Trade Due to
Globalization:
There is also a big potential for the development of corporate Islamic banking services in the EU.
It mainly results from the growing trade relations between the EU and the Association of
Southeast Asian Nations (ASEAN) and the countries of Gulf Cooperation Council (GCC) (Table
1), where Islamic banking has a significant presence and where Islamic banking services
dynamically develop. More and more companies from those countries become clients of Islamic
banks.
While supporting international trade operations of their clients, those banks often need to co-
operate with foreign banks. Potential Islamic banks in the EU could become such partners for
Islamic banks from the ASEAN and the GCC countries.
As the financial sector has expanded globally, Islamic banking has gained popularity. Islamic
banking services have largely profited from financial globalization. Thanks to globalization, the
world is getting closer, and connectivity is getting easier. As a result, establishing banks in
countries in Europe is less complicated. This leads to greater investment opportunities, which
implies that Islamic banks are becoming more powerful and well-known throughout Europe.
Growthof Islamic Banking in UK:
The United Kingdom is the hub of Islamic banking and finance in the West. A large number of
Muslims from all over the world are living in the UK. The opportunity for Islamic banking
industry to grow in UK is comparatively high in Europe as the number of Muslims are increasing
every year. The prior studies show that there are greater opportunities in the UK for development
and growth of Islamic financial system as Muslim community is keen to take financial products.
According to Ahmad (2008), Islamic banking has a great opportunity in UK because it has
Table 1 (Source: Eurostat, 2015)
EU merchandise trade with ASEAN and GCC countries (in millions of EUR)
2009 2010 2011 2012 2013
Export 108 047 127 320 142 223 165 220 176 309
Import 91 162 122 537 153 157 161 643 153 770

achieved an outstanding position in the UK financial market in less than five years. It is also a
good opportunity for UK to expand this industry when London hosted the World Islamic
Economic Forum (WIEF), for Islamic finance with the expertise, innovation and services
fundamental to the industry’s growth. The growth has been proved in the Sukuk (Islamic bonds)
market, where London acted as a major center for the issuance and trading of international bonds
and it gives room for Sukuk to be listed for trading. In 2012, a total of US$34 billion has been
raised through 49 issuances of Sukuk on the London Stock Exchange (LSE), which in 2007, the
first Sukuk listed was for the UAE-based National Central Cooling Company (Tabreed)
amounted US$200 million. Besides, at the end of 2012/2013 the UK market for Islamic finance
was worth around $19 billion which indicates a great opportunity ahead for Islamic banking
industry in UK. In addition, currently in UK, Islamic banks and their clients are treated similar
way as to their conventional counterparties. Many initiatives have been taken to make the
Islamic finance industry more viable and competitive in UK. Some of the initiatives are:
(a) extending tax relief on Islamic mortgages to companies as well as to individuals, (b)
removing double tax on Islamic mortgages, and
(c) reforming arrangements for issues of debt.
Moreover, currently UK is the 9th largest country by Sharia compliant assets which has more
than 20 Islamic finance institutions and six full fledge Sharia compliant banks. There are ample
of facilities in UK which will create great opportunities for Islamic banking and finance
industry to grow such as
(1) more than 20 international banks in the UK are working in Islamic finance, and 6 of them are
fully Sharia compliant,
(2) British banks are increasingly active in the international Sukuk market,
(3) UK domestic banks are expanding their Islamic finance offering to meet demand,
(4) the UK has the largest legal services market in Europe and over 25 law firms with offices in
the UK are supplying Islamic legal services,
(5) there are 9 fund managers offering Islamic asset management services to their clients and all
of the UK’s largest accountants, consultants and professional service firms have Islamic finance
departments,
(6) new standards and qualifications in Islamic finance are being offered by professional
institutes, universities and business schools across the UK,
(7) the London Stock Exchange has raised a total of US$34 billion through 49 issues of Sukuk,
and
(8) the London Metal Exchange (LME) is an important avenue for the growth of Islamic finance
globally - a significant volume of liquidity management transactions concluded by Islamic
finance institutions and other Sharia compliant firms are supported by metals on LME warrant.