September 14, 2016 at 21:03 pm GMT

Islamic Capital Market Growth in Europe

The UK has witnessed continuous development of a strong Islamic capital market. In this Business Intelligence, the DDCAP Group expands on how Europe is following suit and seeking to expand its Islamic finance footprint.

Islamic Capital Market Growth in Europe


The Islamic financial market has continued to outgrow its conventional counterparts, even during the global economic slowdown. The worldwide demand for Islamic financial services, measured by Sharia-compliant assets, increased by 12 per cent in 2014 to reach a record US$2 trillion, tripling since the 2007 to 2008 period, despite the effects of the 2008 Financial Crisis (see fig. 1).

Indeed, the demand for Islamic capital market products, such as sukuk, is predicated on investors’ desire for a more resilient alternative to conventional finance offerings, which many posit led to the 2008 Financial Crisis. As a result, banks and other financial institutions have been subsequently compelled to diversify and extend the list of securities deemed eligible by regulators for inclusion in their liquidity buffers.

Within this context, sukuk have recently played an increasingly active role in the Islamic finance space. This trend is, to an extent, a result of the increasing demand and interest from sovereign issuers, multilateral agencies and corporations seeking to diversify their financing needs and manage liquidity more effectively. Investors and issuers now view sukuk issuance as a platform to manage liquidity, provide asset and infrastructure financing in the real economy, and as a means of ensuring portfolio diversification to potentially achieve a certain degree of insulation from the volatility of other asset classes.

Over the last three years, the Islamic capital market sector has been dominated by sukuk in real terms, with their issuances surpassing US$100 billion and the addition of sovereign issuers from both Muslim and non-Muslim jurisdictions.

Regarding issuance statistics, the first ijara sukuk issued outside the Islamic world was by the UK government in 2014 in the amount of GBP200 million, followed by issuances from the governments of Luxembourg of EUR200 million, Senegal of XOF100 billion, Hong Kong of US$1 billion and South Africa of US$500 million. The vast majority of sukuk issuances remain in the sovereign and quasi-sovereign domain. However, there are strong indications that, with increasing awareness, the market will also anticipate demand from the corporate sector, including in Europe, where overall liquidity has been tightened in the conventional markets, with other forms of funding re-appraised as a result.

Unsurprisingly, the traditional sukuk markets of Malaysia, Saudi Arabia, Bahrain, and Dubai, which have been somewhat subdued in recent years, still represent, collectively, the highest levels of sukuk issuance in the world. Notably, Dubai has recently surpassed Malaysia in sukuk issuance, largely due to the Malaysian central bank’s, Bank Negara Malaysia (BNM), decision to stop issuing short-dated sukuk, or sukuk with up to three-month maturities. This was based on BNM’s belief that there was sufficient liquidity in the country’s Islamic capital markets.

Their issuances, moreover, were being primarily used by foreign banks to manage their liquidity needs, and therefore, doing little to improve the liquidity needs of the domestic market. According to Standard & Poor’s, this reduction in issuance by BNM resulted in a 42.5 per cent reduction in the global value of issuances in the first half of 2015 compared to the same period in 2014. Nonetheless, given the growing familiarity and utilisation over different jurisdictions, sukuk are likely to become a key component of the financial landscape in both developed and emerging markets.


Historically, the speed of development of the Islamic capital market in terms of sukuk issuances has generally been driven by the dominant jurisdictions of Malaysia and member states of the Gulf Cooperation Council (GCC). In recent years, there has been a gradual and sustained effort in Europe to promote Islamic finance, particularly in the UK, Luxembourg and Ireland.

In this regard, the UK has arguably been the most pro-active, due in part to London’s pre-eminent status and role in global finance. Additional factors include the UK’s historical links with the core Sharia finance markets of the GCC and Malaysia, as well as its requirement to meet the needs of the country’s own Muslim population. The UK was recently identified as an important destination for Islamic finance, receiving an index value of 16.2 in the 2014 ICD Thomson Reuters Islamic Finance Development Report, well above the global average of 10.3. This figure represents the value given to important global centres of Islamic finance based on their offerings in terms of education and research, governance, corporate social responsibility and awareness. The UK was the highest ranked non-majority Muslim country.

The sukuk market is an essential part of the Islamic finance market, and London, as a major hub for international bonds, is an important centre for the issuance and trading of sukuk. The outstanding value of international bonds issued in the UK at the end of 2014 was US$3.3 trillion, representing approximately 15 per cent of the global total, second only to the U.S. London is also the leading centre for international bond trading with an estimated 70 per cent of secondary market turnover.

As the first Western sovereign to issue, in 2014 the UK government sold GBP200 million of sukuk with a 5-year maturity and profit rate on the sukuk set at 2.036 per cent, in line with the yield on conventional gilts with similar maturities. This debut sovereign sukuk was oversubscribed by a factor of eleven, with strong demand and orders amounting to approximately GBP2.3 billion from both domestic and international investors. The sukuk was allocated broadly with investors, including central banks, sovereign wealth funds, and local and foreign financial institutions. It was listed on the London Stock Exchange (LSE), which is a key global venue for the issuance of sukuk, having been involved with 57 listings with a total value of US$51 billion. In terms of global sukuk listings, a Nasdaq Dubai report revealed that in June 2015, there was a change in the dynamics of their listings in the traditional centres of Malaysia, Ireland and London. Accordingly, Dubai’s two exchanges, Nasdaq Dubai and Dubai Financial Market, registered total current listings of US$36.7 billion, ahead of Malaysia’s Bursa Malaysia and the Labuan free trade zone listing US$26.6 billion, the Irish Stock Exchange (IE) totalling US$25.7 billion, and the LSE with US$25.1 billion respectively (see fig. 2).

The UK government issued its sovereign sukuk with a number of objectives in mind. One objective was to open up alternative sources of funding at an all-in cost equivalent to conventional gilts, thereby ensuring value for money to the UK public and taxpayer. Another objective was the provision of a High Quality Liquid Asset (HQLA), which could be utilised by domestic Islamic banks as part of their regulatory liquidity and capital requirements. A further objective was to set a precedent that demonstrated to the corporate sector that the UK had implemented a proven platform and infrastructure to enable sukuk to be issued comparably to conventional bonds.

As a result, this now paves the way for sukuk to become an instrument of choice for raising corporate finance. This process has been a work in progress in the UK for more than 15 years and has been supported with a programme of legislative reform targeted at providing a level playing field for Islamic financial instruments.

Thus, two major developments followed shortly after the UK sovereign sukuk issuance. The first was seen as a key milestone in the annals of sukuk development in the UK, as UK Export Finance (UKEF) announced the provision of guarantees for Sharia-compliant financings involving British exporters. In March 2015, it was announced that UKEF would provide a guarantee in support of the US$913 million sukuk issued by Dubai’s Emirates Air Line. This was a ‘triple first’ in its own right. Not only was it the first instance of sukuk certificates being guaranteed by an export credit agency (ECA); it was also the largest debt capital markets offering, conventional or Islamic, in the aviation sector, with an ECA guarantee to date; and, finally, it was the first time that sukuk had been issued to raise finance prior to delivery of an aircraft. This has had a demonstrable effect on the issuance of buyer credits, with ECA providing backing for exporters wishing to offer medium-term funding to markets within member states of the Organisation of Islamic Cooperation (OIC) as part of their overall project bids. Given that the UKEF guarantee ranks alongside that of the UK government, this issue further reinforced the commitment of the government to deepen the Islamic capital market, by encouraging regular or recurrent issues by major European and international issuers.

The second development was initiated in late 2014 by means of further innovation. This involved the International Finance Facility for Immunisation (IFFIm) tapping the international capital markets to raise finance in order to accelerate the availability of funds for immunisation programmes and health systems via the international organisation Gavi, the Vaccine Alliance.

IFFIm currently has nine sovereign donors, including the UK, which has pledged GBP1.63 billion, or 46 per cent of total pledges over a 23-year period. In addition to the UK, several other European governments have contributed donations. In late November 2014, IFFIm issued its inaugural sukuk, raising US$500 million for Gavi. Deemed to be the first benchmark-sized sukuk primarily focused on social impact, it provided institutional investors with a socially responsible investment opportunity that will help vaccinate and protect tens of millions of children against preventable diseases. This sukuk was listed on the LSE and was oversubscribed, with global interest shown from multiple investors.

A supportive architecture underpins the UK Government’s ambition to become a key global player and leader in Islamic finance in the Western world, acting as an enabler to ensure this objective is realised. For example, the presence of numerous leading law firms and professional service companies based in the City of London, which specialise in all aspects of Islamic finance, has greatly added to the UK’s ability to offer advisory and structuring services to Islamic financial market participants around the world.

Notwithstanding the UK’s long established position, Europe has become an important listing destination for international sukuk, for both Asian and Middle Eastern issuers, who are seeking to widen their investor base and simultaneously promote secondary market activity in sukuk markets outside their domiciled countries.

This feature has often been absent from sukuk markets in industry hubs, where the securities tend to be held to maturity. European exchanges including the LSE, the IE and the Luxembourg Stock Exchange have been able to attract Islamic issuers by offering efficient and transparent listing processes and market liquidity profiles.

Regarding funds, Europe has seen a steady growth of Islamic funds domiciled within the EU. There were approximately US$14 billion in Assets under Management (AUM) in the EU as of 2014, according to the Malaysia International Islamic Financial Centre’s report on Islamic Finance in Europe. This accounts for approximately 20 per cent of the global aggregate of Sharia-compliant AUM, up from 12 per cent in 2012.

Generally, the appeal of European domiciles for fund management lies in the attractive combination of tax benefits, regulatory sophistication, operational efficiency and diversification. Each of these factors contributes to the universe of choices for fund and asset managers seeking to satisfy their customers’ preferences. More importantly, in cases where these factors are lacking in other asset managers’ immediate local or regional markets, European markets offer an advantageous alternative for their investment portfolio needs.

Accordingly, traditional fund management domiciles in Europe, such as Luxembourg, the Channel Islands and Ireland, have tended to be among the favoured locations for the incorporation of Islamic funds and offer the provision of ancillary services for local regulatory requirements. The distribution of many of these funds has largely come from London and other core, Islamic financial hubs, in which there is extensive experience from local and international firms available to ensure successful distribution on a global basis.


The future development of the sukuk fund market, from a European perspective, will certainly depend on the volume of new, global sukuk issuance by all types of market players including sovereign, supranational and corporate issuers. However, given the ever-growing cross border reach and sukuk becoming mainstream in Europe, as a result of the enabling financial architecture that is already in place or in development, the prospects of further issuance, listings and wider market development is promising. The Islamic capital market and its sukuk funds subsector have traditionally been referred to as, predominantly, a feature of the Southeast Asian and GCC markets. There are now growing signs that both are finding a complementary and expanding platform in Europe.

Moreover, in the UK and across Europe, the demand for infrastructure development continues to grow rapidly and the requirement for alternative and efficient sources of funding for significant national projects is a priority agenda item. This has resulted in the Islamic financial industry becoming an important and growing focus of numerous international governments.

In the UK, Islamic finance has already played an important role, as illustrated by its inclusion in the financing arrangements and solutions utilised in the development of infrastructure and infrastructure-related projects around London. For example, it has been used to provide development finance for The Shard, London Gateway and the Olympic Village, as well as the re-development of Chelsea Barracks and regeneration of Battersea Power Station.

Islamic finance is a core work stream of the UK Financial Services Trade and Investment Board (FSTIB) established by the Chancellor of the Exchequer in 2013. Consequently, TheCityUK, which sits on the board of the FSTIB, inaugurated the Islamic Financial Market Advisory Group in 2014.

Chaired by DDCAP Managing Director Stella Cox, the group is tasked with providing a central point for UK thought leadership in Islamic finance. Currently, the domestic footprint of the projects deemed relevant to Islamic investment and funding is growing. With the proactive support of the UK government, it is ultimately likely to result in the country’s Islamic capital markets providing a financial platform for regeneration, development and project funding across the United Kingdom.


The DDCAP Group was founded in 1998 and is headquartered in central London, with a presence in the Middle East. The group is majority-owned and controlled by IPGL Limited, which is a private holding company focused on partnering with experienced management teams to build fast growing business in financial services and other sectors. DDCAP Limited (DDCAP) positions itself as an intermediary in the Islamic financial services industry, providing structuring support, trade execution and value-added services to clients across the globe. Its primary markets include the GCC, Southeast Asia, Europe and the US.

Through its unique position in the market, DDCAP is able to provide physical asset facilitation services to over 300 third-party institutions including central banks, government institutions, Islamic banks, conventional banks and managers of Sharia-compliant funds. Additionally, its wholly owned merchant trading company subsidiary, DD&Co Limited (DD&Co), has originated commodity for a large number of structured and syndicated transactions for entities in various jurisdictions, including Dubai, Hong Kong, Kuala Lumpur, London and Riyadh.

DDCAP’s multi-award-winning Asset Facilitation Platform allows its customers to purchase commodities via a secure electronic portal as an alternative to the other transactional methods that remain available. The platform is functional 24 hours a day to resolve the time zone issues faced by customers across numerous jurisdictions.

In addition to being approved by DDCAP’s own Sharia Supervisory Board (SSB), it has also been endorsed by other internationally recognised Sharia scholars. SSB is comprised of esteemed Sharia scholars including its chairman, Sheikh Abdullah Bin Suleiman Almaneea, Sheikh Dr Abdullah Almutlag and Sheikh Dr Mohamed Ali Elgari. In September 2015, DDCAP was proud to announce the additional appointment of leading Malaysian scholar and professor Dr Mohamad Akram Laldin to the DDCAP SSB, reflecting DDCAP’s ever-increasing footprint in Southeast Asia.