“Islamic finance is, and will continue to be, an important part of the government’s overall commitment to ensuring a competitive financial services sector in the UK,” reiterated Sarah McCarthy-Fry MP, exchequer secretary to Treasury, in London at a seminar entitled “New Year — New Opportunities in Islamic Finance,” hosted by the international law firm, Norton Rose, in London recently.
This statement of intent coincides with two notable developments relevant to the European Islamic finance sector in the last two weeks or so. Firstly, the UK Treasury and the Financial Services Authority (FSA) have been working to remove barriers and uncertainty in the regulation of alternative finance investment bonds (sukuk).
Following consultation with the industry, the statutory instrument, the Financial Services and Markets Act 2000 Order 2010, was sent to the House of Commons in mid-January, and the Brown government is confident that the new regulations will come into effect by the end of February. These measures, stressed McCarthy-Fry, will reduce compliance and legal costs for these instruments, and facilitate the issuance of corporate sukuk in the UK.
The other development is that the Luxembourg Tax Authorities, also in mid-January, published the tax treatment for sukuk and a range of Islamic financial products with the aim of facilitating tax neutrality for such products compared to equivalent conventional ones. The wider aim is to develop Luxembourg as another European hub for Islamic finance especially sukuk origination and listings and registration domicile for Islamic funds and trusts.
Luxembourg in fact is emerging as the fastest growing Islamic finance hub in Europe with key developments in the process of being implemented with counterparties in Saudi Arabia and Malaysia over the next few months. In this respect Luxembourg is emerging as a serious alternative hub for Islamic finance to London and Paris, although officials and market players on all sides stress that there is room for all given the nascent state of the industry in the European Union.
The Norton Rose seminar also saw the first public statement made on behalf of the opposition Conservative Party regarding Islamic finance. Mark Hoban MP, shadow (Conservative) financial secretary to the Treasury, confirmed that the Conservative Party has supported the steps taken by the government to create a level playing field for Islamic finance and that it would continue the same approach. He recognized the concerns raised by the audience in respect of a need for clearer criteria to enable the industry to address any government concerns in relation to a UK government sukuk.
The cross-party support (including by the opposition Liberal Democrat Party) for UK government’s Islamic finance initiative has been welcomed by the industry. Farmida Bi, London banking partner, Norton Rose, emphasized “It is extremely good news for the City of London that there is cross party support for the promotion of Islamic finance and that the helpful legislative changes that have been made will be continued irrespective of which party is in power”.
In December 2008, the UK government announced that it was postponing any decision regarding the issuance of a sovereign sukuk for the time being. Minister McCarthy-Fry reiterated at the Norton Rose seminar that the Treasury currently has no intention to launch a UK government sukuk. The minister highlighted the current market conditions and the government’s concern that a UK government sukuk would not offer value for money for both the Treasury and investors.
The financial crisis and global downturn at the end of the last decade precipitated exceptional change in financial services, both in the UK and around the world. McCarthy-Fry warned that the world must continue to learn and implement the lessons that will help strengthen the financial services industry so that it is better able to serve the global and individual economies in future.
“We will continue to pursue a regulatory framework that is an international benchmark. And we will continue to pursue a consistent, politically neutral legal system that is widely used and understood globally. Together, these will help reinforce confidence in doing business with the UK and in investing in the UK.
And these goals will help the UK to continue as a leading financial center, one able to take advantage of growth areas in financial services, including the area I am here to talk about today — Islamic finance,” she added.
The Treasury acknowledges that capitalizing on growth areas such as Islamic finance and supporting their expansion will be hugely beneficial for the health of the sector in the future. Indeed, this support for growth areas relates to one of the lessons from the crisis — the need for a more diverse financial services sector.
Islamic finance, says the UK Treasury, “is an area that has been helped by the openness to new influences and ideas that we have here in the UK, especially in London. With our depth of skill, experience and connections all around the world, we have ensured that the UK has long been the leading Western center for Islamic finance”.
There are at present 22 banks offering Islamic financial products in the UK, including five that are fully Shariah-compliant, which means that there are more banks in the UK offering Islamic finance than in the whole of the rest of Western Europe. The UK also has a Takaful provider, an Islamic hedge fund and nine Islamic fund managers.
Despite the impact of the global financial crisis, Islamic finance remains a growth sector around the world. It is under conditions like the ones faced by international financial markets during the crisis and in its aftermath, explained McCarthy-Fry, that new opportunities for growth and development become increasingly important.
“The issue of corporate sukuk by GE Capital in November, showed the continued appetite around the world for Shariah-compliant finance. This was first listed on the London Stock Exchange, and brought the total number of sukuk listed in London to 20, with total funds raised of over $11 billion. Worldwide, only the Dubai NASDAQ exceeds these figures. The Islamic finance market presents huge long-term opportunities for London and the UK. And it is a market that this government would like to continue to nourish.”
The UK government’s dual objectives for Islamic finance are: a) for business, to maintain London’s position as a European leader for international Islamic finance; and b) for individuals, to ensure that everybody, irrespective of the religious or ethical beliefs, has access to competitively priced financial products.
To facilitate the above, the UK government over the past five years has made a series of reforms to establish a level playing field — in tax and regulation — between conventional and Islamic finance. These include products such as Shariah-compliant mortgages, individual savings accounts and child trust funds.
In the 2009 pre-budget report, Chancellor of the Exchequer Alistair Darling, announced further measures, especially the government’s intention to provide relief from tax on capital gains for alternative property refinance, subject to satisfactory safeguards. The proposed change would allow those who own property that has appreciated in value to obtain additional bank finance in a Shariah-compliant way, using the property as collateral. Such refinancing currently faces prohibitive tax barriers where principal private residence relief does not apply.
The government is also committed to creating, as far as possible, a level playing field on VAT for retail consumers of Islamic finance products. This includes VAT guidance on corporate sukuk.
On the UK government’s position on issuing a sovereign sukuk, McCarthy-Fry dismissed recent speculation that the Treasury may be going down this route. “Contrary to recent speculation, our position on this matter has not changed, and remains that a UK government wholesale sterling sukuk would not at present offer value for money. But I would like to reiterate that this decision was taken after a lengthy consultation and after extensive consideration of a wide range of factors. We will keep this judgment under review and revisit should factors change in such a way that sovereign sukuk issuance becomes more viable,” she advised.
However, the UK government will continue to support the sector where appropriate, in particular via engagement on tax and regulatory issues through meetings such as the Islamic Finance Tax Technical Working Group, which took place at the end of January.
Minister McCarthy-Fry urged the Islamic finance industry to seize the opportunities that the new financial landscape offers. With the whole of the financial services industry taking stock of its actions and looking to rebuild trust, there are some key principles underpinning Islamic finance that could help shape this new landscape.
The rejection of certain speculative activities and the encouragement of an ethical approach to finance, to name a couple, could contribute significantly to the wider debate on the future of the financial markets, she added. In this respect, she would also like to see the sector grow in size and in influence since a more diverse financial sector will be better placed to provide businesses with the services they need for sustainable growth.
