I am a Muslim, my husband is English. We have been married for 30+ years.
If I were to say to my daughter that she has to marry a Muslim guy or I disapprove her choice of partner, I know what will happen.
She will refuse to speak to me and we will be estranged. So the best thing to do is to put aside your misgivings, give them your blessing and hope for the best.
Why are you worried about the Sharia Law when your niece and her husband will be returning to the UK? If they re register their marriage here, then she will be protected under the UK Civil law surely?
The Sharia Law in countries such as Egypt or Singapore has limited jurisdictions, the Sharia Court is there to resolve disputes in family matters related to marriage, divorce, custody of children and inheritance.
If he were to marry a 2nd time in Egypt without her knowledge, under the Egyptian law, he will face imprisonment and a fine and she has the right to divorce him.
As for the children, it will be up to them to decide which religion they want their children to embrace if any.
Have you met him? If you spend time to get to know him, you might feel more comfortable with the situation.