Measures to facilitate the development of Islamic Finance in the United Kingdom

• Islamic finance refers to the provision of financial services in accordance with the principles of Islamic law ("Shariah") concerning spiritual, mental and physical behaviour. Asset size under Islamic finance had registered robust growth of 11.2.% per annum during 2018 - 2023, outperforming the overall financial sector's 6.0%.^{1Legend symbol denoting Islamic Corporation for the Development of the Private Sector and London Stock Exchange Group (2024) and Financial Stability Board (2024).} At US$5.5 trillion (HK$42.9 trillion) in 2024, Islamic finance assets accounted for approximately 2% of global financial assets, and are projected to expand by 36% in four years, reaching US$7.5 trillion (HK$58.5 trillion) by 2028.^{2Legend symbol denoting Standard Chartered (2025).}
• Hong Kong's aspiration to develop Islamic finance began in 2007. To level the playing field, amendments to the legislative framework were made in July 2013 to allow sukuks (commonly known as "Islamic bonds") to be taxed in comparable ways as conventional bonds. This was followed by the inaugural government sukuk issuance in September 2014. Despite a promising start, observers pointed out that growth of Islamic finance in Hong Kong had not seen notable development. Recently, the Government has signalled renewed effort to develop the Islamic finance market, as part of the initiatives to strengthen economic ties with Middle Eastern countries, including development of more Shariah-compliant financial products and furthering financial cooperation with Middle Eastern markets.^{3Legend symbol denoting 信報(2024).}
• Globally, many Western places strive to gain a share in the Islamic financial industry, as attracted by the industry's growth prospect and sizable financial capitals (including sovereign and private wealth)^{4Legend symbol denoting Middle Eastern sovereign wealth funds ("SWFs") account for more than 40% of the total assets of US$13 trillion (HK$101.4 trillion) managed by the world's SWFs. Moreover, family offices in the Middle East have grown rapidly in prominence, with total Assets Under Management estimated to reach US$159 billion (HK$1.24 trillion) in 2024 and forecasted to grow further by 44% during 2024 - 2030. See Mitsui & Co. (2025) and Deloitte (2024).} of Middle Eastern countries. The United Kingdom ("UK") was the first non-Muslim country issuing sovereign sukuk in June 2014. It has also since then grown to become the largest Islamic financial hub among non-Muslim majority countries, managing Islamic finance assets of US$42.6 billion (HK$332.4 billion) in 2023, approximately 0.9% of the global Islamic finance markets.^{5Legend symbol denoting Islamic Corporation for the Development of the Private Sector and London Stock Exchange Group (2024).} This issue of Essentials looks into the UK's experience in growing the market. It first reviews the policy initiatives and progress made thus far in Hong Kong, before discussing the UK's policy support for Islamic finance, covering (a) regulatory facilitative measures; and (b) market development measures such as capability building.

• Many elements that are ingrained in the financial industry – such as receipt and payment of interest, excessive uncertainty, speculation, short selling – are forbidden according to Shariah.^{6Legend symbol denoting For example, Shariah does not permit receipt and payment of "riba" (interest), "gharar" (excessive uncertainty), "maysir" (gambling), short sales or financing activities that it considers harmful to society. See International Monetary Fund (2017).} Islamic finance is therefore developed to serve modern-day financial management needs through Shariah-compliant institutions and products. As of 2023, Islamic banking comprised the largest piece, accounting for 73% of total Islamic financial assets globally, followed by sukuk with a 18% share, while Islamic funds, takaful (i.e. Islamic insurance) and other Islamic financial institutions together made up the remaining 9%.^{7Legend symbol denoting Islamic Corporation for the Development of the Private Sector and London Stock Exchange Group (2024).}
• Understandably, the Islamic finance industry is dominated by Muslim-majority countries (e.g. Malaysia, Saudi Arabia and United Arab Emirates ("UAE")) as supported by domestic demand. About 95% of the world's outstanding Shariah-compliant financial assets are concentrated in 10 Muslim-majority countries.^{8Legend symbol denoting The top 10 countries by value of Sharia compliant assets are: Iran (34% market share), Saudi Arabia (23%), Malaysia (14%), the UAE (8%), Kuwait (4%), Indonesia (3%), Bahrain (3%), Qatar (3%), Türkiye (2%) and Pakistan (1%). See Islamic Corporation for the Development of the Private Sector and London Stock Exchange Group (2024).} Nevertheless, many non-Muslim-majority countries have made efforts to tap into this market in view of the strong growth and resilience of the Islamic finance sector, as well as growing interest from non-Muslim investors. Indeed, some non-Muslim-majority places have successfully gained top 10 positions within certain niches, such as Ireland in Islamic retail investment funds, and Switzerland in other Islamic financial institutions (financial technology, microfinance, etc.).^{9Legend symbol denoting Islamic Corporation for the Development of the Private Sector and London Stock Exchange Group (2024) and Fitch Ratings (2024a).}
• The regulatory approaches to Islamic finance in Muslim and non-Muslim jurisdictions differ in a number of ways. First, many Muslim countries have comprehensive regulatory frameworks catered for Islamic financial products. Non-Muslim places generally facilitate Islamic finance by adapting their existing financial regulatory frameworks to provide a level playing field, so that Islamic financial products are not disadvantaged compared to conventional financial products, especially in terms of tax treatments and regulatory burden. Second, Muslim and non-Muslim countries have different approaches to Shariah governance, i.e. ensuring Islamic financial products are compliant with Shariah principles. In Muslim-majority countries, national regulators play a substantial role in upholding Shariah compliance of Islamic financial products through centralized advisory boards and/or mandatory governance standards.^{10Legend symbol denoting For example, Malaysia has a centralized Shariah supervisory board. In contrast, Qatar employs a decentralized Shariah governance model, where individual Islamic financial institutions have their own Shariah boards, but there are provisions in the legislation specifying operational requirements for such boards. See Bank Negara Malaysia (2025) and Qatar Financial Centre (2020, 2025).} In non-Muslim places, regulators generally leave the matter of Shariah compliance to individual financial institutions' Shariah Supervisory Boards, i.e. internal boards comprising Shariah scholars (i.e. a person well-educated in Shariah) and other relevant experts.^{11Legend symbol denoting Accounting and auditing standards are set by industry bodies like the Accounting and Auditing Organization for Islamic Financial Institutions ("AAOIFI"), which are widely followed across jurisdictions.}

• Hong Kong's quest to develop Islamic finance began in 2007 when the matter was highlighted in the Policy Address that year. This led to: (a) the Hong Kong Monetary Authority ("HKMA")'s clarification on the approach to regulating Islamic banking services in 2008, making clear that regulatory framework applicable to conventional banking business were in general applicable to banks with Islamic financial activities, and that the responsibility for ensuring Islamic products' Shariah compliance should rest with the banks;^{12Legend symbol denoting Hong Kong Monetary Authority (2008).} (b) legislative amendments in 2013 to allow sukuks to be taxed in a similar way as conventional bonds; and (c) legislative amendments in 2014 enabling the issuance of sukuks under the Government Bond Programme ("GBP"). Under GBP, three sukuks totalling US$3 billion (HK$23.4 billion) were issued in September 2014, June 2015 and February 2017 respectively.
• However, the above initiatives were not followed by additional sukuk issuances, and offers of new Islamic financial products in Hong Kong have been relatively sparse. Some commentators attributed the lacklustre growth in Hong Kong's Islamic finance market to: (a) insufficient professionals equipped with relevant knowledge and experience in Islamic finance, such as Shariah scholars;^{13Legend symbol denoting In 2007, HKMA said there was a shortage of appropriately-qualified Shariah scholars. There appears no official statistics gauging the professional size today.} and (b) the piecemeal approach to regulatory reform. As only sukuks have undergone comprehensive review and supported by legislative amendments so far, some consider that the regulation and tax treatment of other Islamic finance products may remain unclear.^{14Legend symbol denoting Katterbauer (2023), South China Morning Post (2024, 2025), 信報財經月刊(2023) and 顏寶剛(2025).}
• While only about 4% of Hong Kong's population is Muslim,^{15Legend symbol denoting As of 2021, Hong Kong had an estimated 300 000 Muslims, comprising 150 000 Indonesians, 50 000 Chinese, and 30 000 Pakistanis. See GovHK (2023).} recent progress in strengthening ties with Middle Eastern economies is expected to provide impetus for the development of Islamic finance, attracting both Muslim and non-Muslim investors locally and internationally. In particular, Hong Kong has made major strides in financial connectivity with Saudi Arabia since 2023, including (a) arrangements to allow cross-listings on the stock exchanges of Hong Kong and Saudi Arabia in February 2023, and (b) the listing of Asia's first sovereign sukuk exchange-traded fund ("ETF") in May 2025.^{16Legend symbol denoting Hong Kong Exchanges and Clearing Limited (2024) and The Standard (2025).} Moreover, Hong Kong and Malaysia also agreed on collaboration in Islamic finance in May 2024, although actual plans have yet to be announced.^{17Legend symbol denoting Bank Negara Malaysia (2024) and Hong Kong Monetary Authority (2024).} Most recently in May 2025, high-level official visits to the Middle East concluded with 59 memoranda of understanding ("MOUs") with Qatar and Kuwait.^{18Legend symbol denoting GovHK (2025) and Hong Kong Trade Development Council (2025a, 2025b). The MOUs, which were signed between Hong Kong and Qatari/Kuwaiti enterprises and organizations, covered a range of sectors including trade and investment promotion, financial services, transport and logistics, arts, and innovation and technology, education, and legal cooperation.}
• To facilitate development of Islamic finance, the Government added "financial professionals with Islamic market experience" to its Talent List in March 2025, providing immigration facilitation to such professionals.^{19Legend symbol denoting Talent List Hong Kong (2025).} It is unclear how many have arrived in Hong Kong under this arrangement so far. According to the Financial Secretary, Hong Kong will strive to develop more Shariah-compliant financial products, further extend cooperation with the Middle East into bonds and derivatives markets, and even explore collaboration in infrastructure development and professional services.^{20Legend symbol denoting 大公報(2025).}

• The UK government ramped up its effort in developing Islamic finance in early 2000s, motivated by the ambition to establish London as Europe's Islamic finance hub on one hand, and financial inclusion on the other, given that around 6.5% of the nation's population was Muslim. Due to the UK's longstanding economic ties with Muslim countries, Islamic financial institutions were present in the UK as early as 1980s.^{21Legend symbol denoting Belouafi and Chachi (2014) and GOV.UK (2014).} However, major government efforts to develop the Islamic financial industry began in 2001 with the establishment of a high-level working group led by the Bank of England and the HM Treasury to examine the barriers to Islamic finance in the UK.^{22Legend symbol denoting TheCityUK (2022).} A key barrier identified by the working group was the double taxation on Islamic mortgage products, which made them significantly more expensive than their conventional counterparts.^{23Legend symbol denoting The Financial Services Authority (2007).}
• As such, the UK has undertaken facilitative measures, guided by the principle of "no obstacles, no special favours", meaning that Islamic and conventional finance operate under equivalent standards, regulated in the same way as their mainstream counterparts. Key features of the UK government's initiatives to facilitate development of Islamic finance are as follows: ^{24Legend symbol denoting Lord Briggs Of Westbourne (2023).}
  • (a)
    Tax treatment: the UK government and regulators have created an environment where Islamic financial institutions and their clients were not treated any differently to their conventional counterparties in terms of taxation. Following the tax law amendment in 2003 to remove double stamp duty on Islamic mortgages (ijara), the Finance Act was amended in 2005 to introduce the "alternative finance arrangements" for common Islamic finance products to ensure they receive the same taxation treatment as conventional financial products, for instance: (i) purchase and resale arrangements (murabaha) and diminishing shared ownership arrangements (diminishing musharaka) are deemed equivalent to conventional loans or mortgages; (ii) deposit arrangements (mudaraba) and profit share agency arrangements (wakala) are treated similar to conventional bank deposit accounts. This is alongside continued updates of relevant taxation laws as new types of Islamic finance services emerge.^{25Legend symbol denoting For example, refinancing of property using Shariah-compliant arrangements (such as diminishing shared ownership) used to receive worse tax treatment than conventional loans. In response to voices from the industry, amendments to the tax law were made to remove the difference. See HM Treasury (2024) and Tax Adviser (2024).}
  • (b)
    Regulatory adjustment to bring new Islamic products under proper oversight: Regulatory changes were introduced to ensure that regulatory treatment of Islamic financial institutions and products was consistent with their counterparts in conventional finance. This included bringing products that previously fell outside the regulatory framework into regulation (e.g. ijara did not enjoy the same levels of protection as customers for conventional mortgages before 2007), and re-defining Islamic products for proper oversight (e.g. sukuk was deemed collective investment scheme before 2010, hence subject to high compliance burden and restricted access to retail investors).^{26Legend symbol denoting The Financial Services Authority (2007) and Clifford Chance (2010).}
  • (c)
    Sharia-compliant central bank liquidity facility: The Bank of England introduced the Alternative Liquidity Facility ("ALF") in December 2021, marking the first non-interest-based, Shariah-compliant liquidity facility offered by a Western central bank. Under the new arrangement, Islamic banks will receive "return" instead of interest from the reserves deposited at the central bank. Before the introduction of ALF, UK Islamic banks (currently five such banks) could not place deposits with the central bank due to the interest-bearing nature. They had to hold large cash reserves or high-quality and liquid sukuks (which remain scarce in the market) to fulfil regulatory liquidity requirements, placing them in a competitive disadvantage.^{27Legend symbol denoting The deposits so placed with the central bank are backed by sukuks. See Bank of England (2020).}
  • (d)
    Industry collaboration on Islamic product innovation: Although the UK government does not offer incentives to promote Islamic finance, it has worked closely with the financial industry to facilitate the market development. One of its major partners is the Islamic Finance Council UK ("UKIFC"), a non-profit advisory body comprising industry experts in Islamic and ethical finance, with some based in Malaysia and UAE. In addition to soliciting advice on regulatory updates, the government also worked with UKIFC on product innovation. For example, the UK government is in the process of developing alternative student loan products based on Shariah principles, with UKIFC appointed to provide technical assistance.
  • (e)
    Close cooperation with Muslim economies: The UK government has actively sought partnership with Muslim-majority countries, having signed cooperation agreements with Saudi Arabia, Malaysia, Qatar, Türkiye and Bahrain to develop the Islamic finance sector.^{28Legend symbol denoting It also has economic cooperation agreements in investment with UAE, Indonesia and Pakistan.} The partnerships led to establishment of UK subsidiaries by Islamic banks (e.g. two Qatari Islamic banks established subsidiaries in the UK in 2008 following official visits).^{29Legend symbol denoting The Worldfolio (2015a, 2015b).} Moreover, such cooperation also reportedly resulted in major investments in the UK by Muslim economies (including both public and private sector investors), such as the £467 million (HK$5.97 billion) funding for London's Battersea Power Station by two Malaysian Islamic banks and a UK bank through a Sharia-compliant syndicated loan in 2014.^{30Legend symbol denoting Reuters (2014).}

    More recently, the UK has also taken a leading role in promoting green and sustainable Islamic finance through setting up in 2020 the Taskforce on Islamic Finance and the UN Sustainable Development Goals, with the participation of major Muslim economies. Under the initiative, the London Stock Exchange Group ("LSEG"), the International Capital Market Association, and the Islamic Development Bank jointly developed a guidance in 2024 to provide key market participants with information on how sukuk may be labelled as green, social or sustainable.
  • (f)
    Islamic finance training hub: Leveraging the country's wider strengths in research and higher education, the UK has become one of the top five largest providers of Islamic finance education globally. Some internationally well-known Shariah scholars in Islamic finance were educated in UK universities.^{31Legend symbol denoting TheCityUK (2022).} In terms of professional qualifications, the UK-based Chartered Institute for Securities & Investment co-developed the Islamic Finance Qualification ("IFQ") in 2007 under the support of the Central Bank of Lebanon. The IFQ has become a widely used and highly regarded internationally as a leading professional qualification for banking professionals in Islamic finance roles, with approximately 4 000 exams sat globally by December 2018.
• In terms of policy outcome, a relative well-developed ecosystem of Islamic financial institutions has grown in the UK over the past decade. There are over 20 conventional banks offering Islamic financial products.^{32Legend symbol denoting Global Finance (2024).} Islamic financial products may constitute only a niche segment locally, but they range from deposits, loans, to bonds and investment funds, reflecting the outcome of same-taxation policy, professional training strength on Islamic finance, and close collaboration with Muslim economies. Specifically, LSEG launched a dedicated sukuk segment on its fixed income exchanges in 2015, and has offered a range of internationally recognized Islamic equities and sukuk indices.^{33Legend symbol denoting FTSE Russell (2024).} Through continued product sophistication (e.g. adding sustainability feature), LSEG is now among the top three listing venue for sukuk globally, with important players such as the Islamic Development Bank recently listed on the market.^{34Legend symbol denoting Fitch Ratings (2024b).}