by Darren Craig and Shakeel Adli of law firm CMS
ISLAMIC Finance (IF) is on the rise in Scotland. There are more institutions here in the UK, compared to anywhere else in Europe or North America, offering this innovative form of investment.
IF involves the application of the Shariah, the system of religious law which applies to those of Muslim faith, to modern banking and finance. Its most notable feature is the prohibition on the payment of interest, prioritising equity-like risk-sharing over debt. It does however come with a wider range of conditions including the exemption of assets which do not comply with the Shariah such as tobacco, alcohol and weapons of war; a ban on any transactions involving any degree of speculation or gambling; and a requirement of certainty within the key terms of any contracts.
While IF is based on Shariah Law, it is open to anyone irrespective of their individual beliefs with, in fact, very few transactions motivated by religious sensibilities.
The global IF sector is significant with over 1400 financial institutions that are active across 67 countries with assets currently valued at $3.5 trillion US Dollars.
IF transactions are already well established in Scotland. In 2012, for example, Shariah compliant Gatehouse Bank purchased Petrofac’s headquarters in Aberdeen so, while this is not a new phenomenon, this form of financing is on the rise.
Over the last five years, Scotland has seen £250m worth of IF property investment deals completed in Glasgow, Edinburgh and Aberdeen. This includes the £46m purchase of the West Campus, a commercial property in Aberdeen’s Westhill Business Park, by Gulf Islamic Investments in 2018 as part of its international portfolio expansion; and the £55m acquisition of Glasgow’s Atlantic Quay 1, a 122K square foot Grade A prime office bought by the Bank of London and the Middle East in partnership with Darin Partners.
Earlier this year, CMS advised Abu Dhabi Islamic Bank, a leading Shariah compliant financial institution, in providing structured Islamic financing of £20m to Urbium Capital Partners for its acquisition of a Sainsbury’s store in Edinburgh.
As highlighted by these transactions, IF has been growing in Scotland and across the UK over the past two decades. This development has been spurred on in large part by the UK Government’s creation of a level playing field between IF and other conventional forms of finance from a regulatory and tax perspective. As a result, here in Scotland we are now witnessing a rise in investment by Shariah-compliant investors which is benefitting our economy.
The growth of IF is largely due to what it offers within the M&A market. With better pricing and greater flexibility in its structuring, it provides an ideal option for parties that are seeking access to more liquid funding sources or new investors. IF will often provide better commercial terms compared with those available from conventional financiers. Combining IF with more conventional products can ensure transactions are more bankable and provide investors with greater diversification of their portfolio as part of prudent financial planning.
The global growth of IF is occurring at a key moment in time when the world economy is looking for further options to respond to some major challenges, not least rebuilding from the financial impact of Covid-19. In the wake of Cop-26, IF’s focus on ethical and environmental considerations within investment decisions, gives it further impetus in today’s economy making it an ideal option for those looking to embrace innovative financial solutions beyond traditional banking.
With a global IF practice and a team of lawyers actively advising clients on UK IF transactions, CMS is taking a market leading role in promoting the potential of this form of financing. We have joined a range of other institutions including the Bank of England to promote how IF can contribute towards positive economic outcomes for everyone in Scotland, regardless of their religious beliefs.
Darren Craig is a partner in the property finance team and Edinburgh Managing Partner and Shakeel Adli is the Head of Islamic Finance at law firm CMS
