All questions

Common structures

i Consumer finance

Shariah-compliant consumer finance providers in the UK currently occupy a niche space advancing funds to customers in the form of simple murabahah financing and offering deposit investments in the form of profit-sharing investment accounts based on the principle of wakalah. Prominent consumer finance banks in the UK include Gatehouse Bank, the Bank of London and the Middle East as well as branches of some well-known Middle Eastern banks, such as Abu Dhabi Islamic Bank, Al Rayan Bank and QIB UK.

An interesting recent development in Islamic consumer financing has been the establishment in the UK of Beehive, a peer-to-peer financing platform that includes a shariah-compliant window. Beehive's shariah-compliant window uses commodity murabahah financing backed by the Dubai Multi Commodities Centre's Tradeflow commodities trading platform, based in the Dubai International Financial Centre (DIFC). If an investor wishes to invest in shariah-compliant transactions only, it can indicate that preference in its profile.

Beehive uses the Shariyah Review Bureau, which is licensed by the Central Bank of Bahrain, as its shariah board to review potential opportunities for investment. Any investments that are not approved as shariah-compliant by Beehive's shariah board are not made available to the Islamic investor – these are made available only to conventional investors. Assuming an investment is shariah-compliant, Islamic investors may place bids on the Beehive platform to enter into a financing with the end user in much the same manner as a conventional peer-to-peer lending platform. If successful in its bid, the Islamic investor then enters into a murabahah contract with that counterparty.

ii Home finance

The primary structures used in home finance in the UK are ijarah and an ijarah with diminishing musharakah structure, which contain many of the features of a conventional repayment mortgage. Under the terms of an ijarah mortgage, the bank purchases the property (with title in and to the property registered in the name of the bank) and leases it to the homeowner for a specified period. The homeowner gives an undertaking that, at the end of the specified period, it will purchase the property from the bank using the final lease payment, following which legal title is transferred to the homeowner and title in and to the property is registered in the name of the homeowner. Under the terms of an ijarah with diminishing musharakah structure, the bank and the homeowner together purchase the property in proportion to the capital put forward by each of them. However, title in and to the property is registered solely in the name of the bank. The homeowner pays the bank rent for the use of that part of the property that is owned by the bank under the terms of the musharakah. The homeowner also makes periodic payments to the bank to purchase its remaining interests in the musharakah such that the bank's interest diminishes until the homeowner is the sole owner of the property. Once the homeowner has purchased all the bank's interests in the musharakah (and thus is the sole owner of the property), title in and to the property is registered in the name of the homeowner and the mortgage terminates.

Islamic banks in the UK also offer rent-only ijarah mortgage packages that contain features similar to a conventional 'interest-only' mortgage. In this scenario, the homeowner pays the bank rent for that portion of the property owned by the Islamic bank through the musharakah term. At the end of the musharakah term, the homeowner is obliged to purchase all the bank's interests in the musharakah in one go.

Much of the growth in the shariah-compliant home finance market was facilitated by an amendment to the tax laws in the UK in 2003 that removed what had previously been a double charge to stamp duty land tax: once at the date of the joint purchase of the property by the bank and the homeowner (and registration of title in the name of the bank) and a second at the date of the purchase by the homeowner of all the bank's interest in the musharakah (and registration of title in the name of the homeowner). This change in tax law is discussed in Section III.

iii Insurance

Insurance companies in the UK offer takaful products to Muslim customers using structures typical to the takaful market. As with many other facets of Islamic finance, London is seeking to become a hub of takaful and the Islamic Insurance Association of London (IIAL) was launched in July 2015 with the aim of promoting that goal. Lloyd's of London is a founding member of the IIAL and launched an office in the DIFC in March 2015.

Friendly societies and other mutual insurance companies are potential vehicles that could be adapted to provide takaful. Friendly societies in particular have an affinity with shariah principles because all contributions to a friendly society are made voluntarily. Friendly societies have evolved in different ways over the years. Since 1992, most have taken advantage of the ability to incorporate, which allows them to undertake a defined range of activities. There would be significant challenges in establishing a new shariah-compliant friendly society since, to be authorised by the Financial Services Authority to carry on regulated activities in the UK, the friendly society would require significant amounts of regulatory capital. As a mutual institution, a friendly society does not have shareholders that might provide that capital. On the contrary, Section 5(2)(b)(i) of the Friendly Societies Act 1992 provides, in effect, that only members (or persons connected with members) can receive benefits from the society and the converse of this is also generally held to be true, namely that a person cannot be a member of a friendly society unless he or she (or a person connected) receives insurance or similar benefits from the society.

iv Private equity investments

The leverage that private equity funds obtain in connection with investments normally presents an insurmountable barrier to entry for Islamic investors who, as a result, are unable to invest in conventional private equity funds. Fully shariah-compliant funds require tight restrictions on debt and the appointment of a full-time shariah supervisory board to approve individual investments, and they are expensive to establish. The demand does not appear to have been sufficiently high to make overcoming these obstacles economically viable and, as a result, the Islamic private equity space has not grown with any conviction. Opportunities exist in the synthetic feeder fund space in relation to specific identifiable investments, but this is yet to become a significant tool in the UK private equity market.

v Real estate investments

UK real estate is one of the most popular asset classes for both international and domestic Islamic investors. Local players, Gatehouse Bank and 90 North Square, have offered shariah-compliant real estate investment products to Islamic investors for a number of years.

In February 2018, independent real estate investment adviser 90 North Group – Real Estate Partners completed the sale of Lenovo's headquarters campus in the United States for US$135.3 million. The buyer was Bahrain Mumtalakat Holding Company, Bahrain's sovereign wealth fund, in partnership with Sentinel Real Estate Corporation. The sale was executed by 90 North Group in conjunction with its partner Dubai-based Arzan Wealth.

Real estate investments typically apply a wakalah, mudarabah or musharakah structure to invest in an underlying portfolio of real estate assets, as well as shariah-compliant real estate investment trusts. However, care must be taken around certain shariah red flags, including any terms of any underlying leases that may include late payment interest charges. For new assets that are yet to be rented, late payment interest can generally be restructured as a late payment administrative charge – an approach that is common in shariah structures. However, with established assets (especially those held by conventional landlords), late payment interest may be embedded in the contracts and amending such contracts is both impractical and undesirable. In this situation, the documents governing the Islamic investment typically provide that if any haram income exceeds a de minimis threshold (typically 5 per cent of the total income from the real estate assets) then those amounts should either be directed solely to a conventional co-investor (if there is one) or otherwise to charity.

vi Investment funds

As noted above, the specific requirements of shariah-compliant investment funds (such as the requirement for a shariah supervisory board), the restrictions on any leverage that may be applied to investments in assets and the need for an annual shariah audit have meant that the UK has not seen a high number of shariah-compliant investment funds established.

vii Other areas

The UK government became the first sovereign national government outside the Islamic world to issue a sukuk with Her Majesty's Treasury's £200 million sukuk issuance in June 2014. The sukuk was structured as a sukuk al-ijarah (being the simplest and most widely accepted Islamic finance structure) and pays out profits based on the rental income from three government-owned properties in lieu of interest. The £200 million sale was more than 10 times oversubscribed by investors in the UK, the Middle East and Asia, attracting orders of £2.3 billion. The interesting aspect of the structure is that it did not adopt the delegate model (the Islamic equivalent of a conventional bond trustee) but opted instead to replicate the structure used for UK government gilts. While a comparatively small issuance by the standards of the UK government, the sukuk was intended to act more as a marketing tool for the UK government in its push to promote the UK and London as a centre for Islamic finance.

Following on from that, UK Export Finance participated as guarantor of Emirates Airline's issuance of US$913,026,000 sukuk in March 2015. The proceeds of the sukuk issuance were to be used to purchase four new Airbus A380-800 aircraft, which would become the ijarah assets. In addition to being the world's first sukuk supported by an export credit agency, what was particularly interesting about this transaction was that there was a lead time between the issuance of the sukuk and the Airbus aircraft being available for delivery. As a result, for the period between the issue date and the relevant aircraft delivery dates, the proceeds of issuance were invested in what were known as 'rights to travel' on Emirates aircraft. This was an example of the UK government seeking to promote Islamic finance in tandem with the interests of British industry (the wings for the Airbus A380 are manufactured in Filton, near Bristol, and Broughton, in North Wales). It is also another example of alternative assets – the rights to travel – being used to underpin sukuk and builds on the success of issuances by Axiata Telecom (which utilised airtime vouchers) and FWU Group (which utilised the intellectual property in computer program source code) of sukuk backed by alternative assets.


Reforms to tax law and regulation have led the way in terms of the accommodation of Islamic finance within the laws of the UK. In 2003, Parliament passed the Finance Act 2003, which introduced the concept of alternative property finance to cure the double charge to stamp duty land tax that had affected the Islamic mortgage market up to that point. Under ijarah and diminishing musharakah structures there are effectively two sales of the property being financed: the first when the bank buys the property from the vendor and the second when the homeowner completes repayment of the financing and buys the property back from the bank. Each of these purchase transactions previously gave rise to a charge to stamp duty land tax, which made the Islamic mortgage market prohibitively expensive. The Finance Act 2003 introduced specific exemptions for Islamic mortgages to ensure that they incurred only one charge to stamp duty in the same manner as a conventional mortgage.

The introduction of the various regulations to facilitate sukuk issuance in the UK between 2007 and 2010 also gave rise to a need to include changes to tax law on the basis that the most common structure used for sukuk (and the one used for the UK government's sukuk) is ijarah based on property. The Stamp Duty Land Tax (Alternative Finance Investment Bonds) Regulations 2010 fixed a point of confusion by clarifying that the exemption from stamp duty land tax that applies to a transfer of leases as part of an alternative finance income bond structure will not be denied on the basis of other provisions of those regulations that would otherwise deem such a transfer to be a grant for stamp duty land tax purposes (i.e., the exemption is extended to ensure that an ijarah-based Islamic finance instrument is treated in the same manner as its conventional equivalent). These regulations are further supplemented by the Alternative Finance Investment Bonds (Stamp Duty Land Tax) (Prescribed Evidence) Regulations 2009, which prescribe the evidence that has to be provided to Her Majesty's Revenue and Customs in relation to claims for relief from stamp duty land tax in these circumstances.

The common purpose of this legislation has been to allow Islamic instruments the same treatment as conventional ones by making a distinction between the transfer of ownership of land for the purposes of occupancy or other use and the transfer of a form of ownership of land that is intended purely to facilitate a shariah-compliant transaction.