The United Kingdom’s economic uncertainty continues with the twin blows of Brexit and the havoc caused by the Covid-19 pandemic.
Like their conventional peers, the UK Islamic finance industry faces economic risks particularly with regards to the housing market. At the same time, Islamic banks are less likely to feel the immediate shocks of Brexit as they are more focused on the domestic market. However, in the near-term, domestic banks will experience asset quality and profitability pressure due to the pandemic, according to Arif Bekiroglu, Vice-President, Senior Analyst at Moody’s.
“Over the medium term, the operating environment for domestic issuers will become more challenging than if Brexit had not occurred given that we expect the UK economy will be smaller as a consequence of Brexit, which in turn will moderate balance sheet growth opportunities,” Bekiroglu told Salaam Gateway. Among the risks of leaving the European Union was losing the right to the passporting scheme that previously enabled UK firms to conduct business in the countries of the EU and EEA without the need for further local authorisation.
Since the UK left the EU this year, local firms have to seek individual country authorisation to operate in that market. Following the UK-EU Trade and Cooperation Agreement both sides have agreed to establish a joint Declaration on Financial Services Regulatory Cooperation.
The framework aims to “…establish durable and stable relationship between autonomous jurisdictions. Based on a shared commitment to preserve financial stability, market integrity, and the protection of investors and consumers.” Both the UK and EU have said they hope to sign a Memorandum of Understanding establishing the framework for this cooperation by March 2021.
Gatehouse, one of six local standalone Islamic banks, said Brexit has had little immediate impact on its operations. “There’s currently no impact and no direct effect is expected in the immediate future due to the fact our primary activity focuses on UK property and UK-based savings,” said Charles Haresnape, CEO at Gatehouse Bank. “However, any major lasting impact on the UK economy in general caused by Brexit could eventually filter through and have an effect in future.” Another local Islamic bank is showing confidence in the UK economy.—Salaam Gateway