LONDON, 12 March 2008 — Financial institutions in the UK are awaiting a further announcement in Thursday’s Budget Speech by the British Chancellor of the Exchequer Alistair Darling regarding equal tax treatment in Islamic financial products, especially Sukuk (Islamic bonds), and equal risk weighting for Shariah-compliant mortgages.
The Treasury is also expected to give a status report on the latest developments in its consultations with the market regarding the issuance of a benchmark UK sovereign Sukuk in the wholesale sterling market and a retail Sukuk possibly to be launched by the state-owned National Savings and Investments (The Post Office).
The market is expectant of a lead from the Treasury and the Financial Services Authority (FSA), the UK banking regulator, as a number of UK corporates have confirmed that they are interested in issuing Sukuk to raise proceeds to finance expansion, refinance existing expensive debt and for other balance sheet purposes.
In a recent report titled “Islamic Finance in the UK: Regulation and Challenges,” the FSA concluded that “the potential for the future growth of Islamic finance, in the retail and wholesale markets, is clear and both the government and the City are actively promoting this objective.
London’s emerging role as a hub for Islamic finance is underpinned by... a wide skills base, innovation and flexibility and historical links with the Middle East.
These will remain strong. The government’s tax and legislative framework has established a level playing field for a variety of products such as mortgages, bonds and insurance... We are keen to see the industry expand, although we recognize this will bring new regulatory challenges.”
Only two weeks ago, the FSA authorized and licensed European Finance House (EFH), a subsidiary of Qatar Islamic Bank (QIB), to operate as an Islamic investment bank in the United Kingdom.
EFH will provide Shariah-compliant financial services and solutions to corporate, institutional and high net worth clients primarily in the UK, continental Europe and the GCC markets.
This brings to five the number of Islamic financial institutions authorized in the UK — the Islamic Bank of Britain (IBB); the European Islamic Investment Bank (EIIB); the Bank of London & the Middle East (BLME); Securities House (UK); and EFH. A license for an Islamic investment bank has also been lodged by Gatehouse Capital plc, a wholly owned subsidiary of Kuwait’s Global Securities House.
The FSA authorization enables EFH to operate as a fully-fledged bank. Salah Jaidah, CEO of Qatar Islamic Bank (QIB) and a board member of EFH, speaking in London, explained, “EFH is not just another bank in the London Market, but one of its kind for three reasons. It is the only Islamic bank in London that can claim over 25 years experience from day one, thanks to its majority shareholder, QIB, which has been a pioneer Islamic bank since 1982. Second it is the only Islamic bank in London that is part of a global network and can offer to its clients cross continent transactions in the Middle East via QIB and in Asia via our affiliate Asian Finance Bank (AFB). Last but not least, we have been able to attract high caliber executives with considerable experience in the European and UK banking sector.”
EFH’s short-term strategy will focus on investment banking rather than retail products and services, but the long-term objective for the bank, according to CEO Michael Clark, will be to build close partnerships with its clients; to quickly become a key player in the UK and European Islamic banking markets; to offer products and solutions to a wide range of clients in the UK; and to play a major role in attracting investment from the Middle East into the UK and Europe. The bank will also support and accompany UK and European investors, who are interested by the booming Middle East market.
While QIB owns 66 percent of the EFH equity, other shareholders include Sheikh Hamad ibn Jassem Al-Thani, the prime minister of Qatar; Groupe Financiere Centuria, the French independent asset management and advisory group; and the founding Development Team.
QIB is the largest Islamic bank in Qatar and the fifth largest company quoted on the Doha Securities Market (DSM) with assets in excess of $5.3bn. It also controls 57 percent of the Islamic banking sector in Qatar.
EFH, backed by the strength and business of its parent, QIB, could potentially become the most successful Islamic bank in the UK, which is a competitive, tough and costly market.
Both IBB and EIIB shares are partially listed on the Alternative Investment Market (AIM) in London. IBB shares at the end of February traded at 12 pence compared to over 15 pence in March 2007 and 25 pence at the launch of trading on Oct. 12 2004. At one stage in October 2007, IBB shares fell to an all-time low of 3.5 pence. Only 47.17 per cent of IBB shares are listed on the AIM. IBB Chief Executive Michael Hanlon last year resigned abruptly after failing to secure more funds from the Bank’s owners who include Sheikh Hamad ibn Khalifa ibn Hamad Al-Thani of Qatar; the Qatar International Islamic Bank; DCD London & Mutual Company and a number of nominee companies administered by HSBC and others.
EIIB shares similarly dipped from 16 pence in June 2006 to 7 pence on Feb. 26, 2008. In October 2007, it fell to just over 5 pence. Significant EIIB shareholders include BNP Paribas (on behalf of clients); Saudi British Bank (on behalf of clients); International Investment Bank; AWAL Group and Al-Amal Investment and Trading. EIIB, which started operations in April 2006, has also reported a net loss of GBP4.48m for 2007. This includes a GBP2.48m pre-tax loss as “a result of the fall in value of the commercial property portfolio held by the EIIB Pan European Islamic Real Estate Fund.”
According to the EIIB’s operating and financial review for 2007, the first half of the year saw its capital markets business thriving through “some landmark transactions.” But in the second half of 2007, says EIIB, the “global credit crunch seriously impacted risk sentiment in Western economies as well as affect issuances in the Sukuk market.”
