Shariah-Compliant Finance: A promising sub-sector that should not be overlooked

This article was originally published by The Mace Magazine.

Shariah-compliant finance, otherwise known as Islamic finance, may still only make up a niche section of the wider economic landscape, but it is an area that is growing swiftly and its potential to contribute to the UK’s financial strength shouldn’t be overlooked. In 2025, the approximate value of the UK’s Islamic finance market was £5.6 billion, with this expected to grow to nearly £5.9 billion in 2026.[1] As the modern Islamic finance industry only originated in the 1960s and 70s, this makes it one of the fastest growing areas of financial services globally and a promising sub-sector that must be nurtured in order to achieve its full potential.[2]

What is Islamic finance?

Despite its fast-paced growth and rising popularity, there remains a lack of understanding about what Islamic finance is, how it differs from conventional finance and who can access it. Research from Gatehouse Bank’s latest Islamic and Ethical Finance Report found that three in ten (30%) people believed that Islamic finance is only available to those of the Muslim faith.[3] This is a misconception we must continue to challenge, as, with consumers increasingly being driven by their values and looking to align these values with their decision-making, Islamic finance can provide a compelling alternative to conventional finance for people of any religion, or none.

The main difference between Shariah-compliant and conventional finance is that the former does not pay or charge interest, as Shariah principles state that money should not be generated in and of itself. Instead, funds must be used to generate profit supported by a genuine trade or business-related activity. Additionally, finance and investments must not be used to support harmful sectors, such as alcohol, tobacco, gambling, adult entertainment and the arms industry. This socially responsible approach to investments and managing funds is why many see Shariah-compliant banking as a more ethical option and not just one that caters to those of the Muslim faith.

Positive steps to support the sector

In recent years, the UK government has done a lot to provide the necessary support the Islamic finance industry needs to achieve its full growth potential. In 2014, the UK became the first nation outside the Islamic world to issue a sovereign sukuk and went on to issue a second sukuk in 2021. That same year, changes to tax treatment meant that equivalent Islamic and conventional transactions were served equivalent tax bills and it was announced that the Bank of England would take deposits from UK-based Islamic banks to its Alternative Liquidity Facility (ALF) for the first time. This facility was created specifically to manage the day-to-day cash needs of Islamic banks who are unable to use regular Bank of England liquidity tools due to them being interest-based and was the first of its kind offered by any Western nation.

In 2025, following a campaign by Islamic finance providers in the UK, including Gatehouse Bank, the current government amended Capital Gains Tax (CGT) legislation in their first Autumn Budget, rectifying an unintentional impact on Buy-to-Let customers opting for Islamic finance. This was another win for the industry as it delivered regulatory parity with conventional finance.

What’s next for Islamic finance?

Despite these great steps forward, there remains more to be done if Islamic finance is to be placed on a level playing field with conventional finance and continue to thrive and contribute to the UK economic strength in a substantial way.

In 2025, Gatehouse Bank published a report titled, ‘Striving For Growth: Fostering the UK’s Islamic Finance Sector’ which provided four key recommendations for the UK government to allow the sector to achieve its full potential.

These were:

• Establish a government-led taskforce to identify areas of growth
• Attract new Islamic finance entrants by removing barriers and disadvantages compared to conventional finance
• Develop a cohesive UK government strategy on Islamic finance to level the playing field between Islamic and conventional finance
• Foster global collaboration on Islamic finance.

Since the launch of the report, we have worked closely with government representatives and stakeholders from across the UK’s Islamic finance industry to help establish the Islamic Finance for Growth UK Taskforce. This group was set up to address some of the ongoing barriers affecting the industry and ensure that Islamic finance remains at the forefront of people’s minds when discussions are had about the future of financial services in the UK.

Current barriers that the taskforce is working to address include: inequality in solicitor representation for those seeking Islamic home finance, the need to increase the ALF to meet current demand and the government’s recent decision not to issue a third sovereign sukuk.

The UK’s Islamic finance market not only has the potential to serve the changing needs of consumers and investors but also to have a real, tangible impact on the wider UK economy. At Gatehouse Bank, we are proud to be part of this growing industry and remain committed to driving further change to tackle the remaining legislative challenges and outdated misconceptions to allow Islamic finance to achieve success.

[1] Mordor Intelligence, UK Islamic Finance Market Size & Share Analysis – Growth Trends and Forecast (2026-2031).

[2] British Embassy, Islamic Finance in the UK

[3] Islamic and Ethical Finance Consumer Report 2024, https://assets.gatehousebank.com/production/downloads/Gatehouse-Banks-Islamic-and-Ethical-Finance-Consumer-Report-2024.pdf