KUALA LUMPUR, 9 April 2007 — UK Chancellor Gordon Brown’s recent budget 2007 statement regarding the introduction of comparable tax treatment for Sukuk (Islamic trust securities) and clear guidelines on the treatment of Diminishing Musharaka (for Islamic mortgages) and Takaful (Islamic insurance) products has been widely welcomed by regulators and bankers in Muslim countries.
The chancellor announced that Sukuk are to be brought within the “alternative finance” regime which has been introduced over the past three years to cater to other Islamic finance methods such as Murabaha, Ijara and diminishing Musharaka products.
At the Global Islamic Finance Forum held last week in Kuala Lumpur, several regulators from both the GCC and Southeast Asia confirmed to Arab News that they were looking forward to the UK developments and keen to cooperate with the Treasury in the growing Sukuk market.
Islamic bankers too are excited by the new opportunities that Sukuk origination out of London could offer, albeit that they do not expect an immediate surge of such Sukuk issuances. Badlisyah Abdul Ghani, CEO of CIMB Islamic Bank and head of the Islamic Mandate at the CIMB Group, stressed that “it is a good development. Any jurisdiction that facilitates Islamic financial transactions must always be commended for taking that initiative. What they have done in the UK would spur further growth in that market. Predominantly, most of the Islamic transactions in the UK are more home financing schemes and commodity Murabaha trade finance passing through London. This new development would allow players like CIMB Islamic to do more business there.”
But, he warned that it is a “little bit too early to expect an immediate surge of a Euro-Sukuk market. The possibility is there. It allows for diversification of investment to investors. It also allows issuers better access to capital — both dollar or euro — to meet specific requirements of investors. Issuers out of the euro market may have a better rating compared with issuers from other parts of world. So, this would create a better benchmark.” The CIMB Group, one of the top three banking groups in Malaysia, heads the global table for lead managing the most Sukuk in terms of volume and issuances — ahead of rivals such as HSBC, Citigroup and Dubai Islamic Bank.
In the budget, the UK government announced that “to help widen the investment opportunities that are available to all and support substantial market innovation in Britain,” it is “introducing a new regime for Sukuk (Islamic securitizations) giving comparable tax treatment to conventional securitizations; and giving clarity through guidance on the treatment of diminishing Musharaka (partnership share) and Takaful (insurance) products.”
“These changes,” the Treasury said, “will ensure that British Muslims can get competitive financial services and the city remains at the forefront of developments in financial markets around the world.”
John Challoner, tax partner and Neil D Miller, global head of Islamic Finance at city-based international law firm, Norton Rose, assisted the UK Treasury in the formulation of the above changes. “These changes in the tax legislation are indeed steps in the right direction to ensure that the UK continues to be a jurisdiction of choice in matters relating Islamic Finance and Sukuk issues,” Neil D. Miller said.
“We believe that these changes will also assist the growth of Shariah-compliant mortgage products in the UK market. Banks will be able to securitize these mortgages in a Shariah-compliant manner which to date they have been unable to. This will assist in making these products competitive with conventional mortgage products,” he added.
Owing to the structure of Sukuk, the main tax problem to date is that the issuer, if UK resident will be taxable on the profits received in respect of the assets but will not be entitled to any deduction for payments which it makes to the Sukuk holders in respect of those profits. This problem, Miller said, is solved under the proposed new legislation by treating the income payments as if they were payments of interest so that the issuer will get a deduction in computing its tax liability. In addition, there are provisions which equate Sukuk to traditional debt securities for other tax purposes such as the “qualifying corporate bond” regime and the tax treatment of discounts.
Perhaps, more importantly, added Miller, “the UK changes do not affect the Shariah-compliant nature of the structure, but rather the tax treatment of such structures.”
“Norton Rose has been, and continues to be, very active in lobbying for the introduction of the alternative finance regime for Islamic finance products, including these changes in respect of Sukuk,” Miller pointed out. “The announcement and the draft legislation which has been released are extremely welcome and, when considered in the context of assurances for further changes to be made (for example in respect of Takaful, an Islamic insurance product) could well result in the UK becoming the hub for the global Islamic finance market.”