Supportive legislation boosts UK’s world-leading Islamic finance industry

The UK’s Islamic financial sector is one of the strongest in the world - and the most advanced in Europe - with five Financial Services Authority (FSA) registered fully sharia-compliant banks and 17 other banks offering sharia-compliant windows. This success has been facilitated by important legislative changes which have created a dynamic base for sharia-compliant financial products. The UK's Islamic community now enjoys access to competitive sharia-compliant mortgages, Individual Savings Accounts and Child Trust Funds.

The Chancellor's pre-Budget report in December 2009 included measures to equalise the tax treatment of property refinancing transactions; and, in January, the Treasury introduced measures in Parliament to support the issue of sukuk - an Islamic financial certificate - and thus further increase the investment potential of the UK in Muslim states.

Islamic finance

Islamic finance is based on ethical principles. Followers of the Islamic faith believe that money must be used in a productive way, basing their financial system on risk sharing and profit sharing.

Under Islamic law, interest (known as riba) is prohibited and wealth can only be generated through legitimate trade and investment in assets. Financial activities in areas such as alcohol, pork, gambling and armaments are not permitted.

Islamic law also prohibits fixed income interest bearing bonds. However, Islamic bonds (sukuk) are broadly designed to replicate the economic function of bonds, but with a structure which complies with Islamic principles. While these have an obvious appeal to the Muslim community, sukuk can be issued and bought by anyone of any faith, as with all Islamic products.

Financial Services and Markets Act

The Financial Services and Markets Act 2000 Order 2010, which was announced by the Treasury in the New Year, has been designed to help to provide “a level playing field” for corporate sukuk within the UK. The Order provides clarity on the regulation of corporate sukuk, reducing legal costs and removing unnecessary obstacles to their issuance.

Introducing the measure, Sarah McCarthy-Fry MP, Exchequer Secretary to the Treasury, said: “The Government’s objectives on Islamic finance are to enhance the UK’s competitiveness in financial services by maintaining the UK’s position as a Western leader for international Islamic finance; and to ensure that everybody, irrespective of their religious beliefs, has access to competitively priced financial products.

“This measure is another important step in the development of the Islamic finance sector in the UK and will help to provide a level playing field for Islamic financial products in this country. It is good news for the UK economy and for our Islamic finance industry.”

Islamic finance is an area that has been helped by the openness to new influences and ideas that we have here in the UK. With our depth of skill, experience and connections all around the world, we have ensured that the UK has long been the leading Western centre for Islamic Finance.

Sarah McCarthy-Fry MP

Exchequer Secretary to the Treasury

Previous supportive economic measures include preventing double taxation on Islamic mortgages for individuals and companies, thereby allowing both home-owners and companies to purchase property consistent with their faith. Work has also been done to ensure that the regulatory treatment of Islamic finance is consistent with the Financial Services Authority’s statutory objectives and principles. Reforming the arrangements for issuing debt, meanwhile, has made London a more attractive location for issuing and trading sukuk. The are currently 20 sukuks listed on the London Stock Exchange.

Growth sector

Despite the impact of the worldwide economic downturn, Islamic finance remains a growth sector with the global market for Islamic financial services estimated to have risen by 25 per cent to reach $951 billion by end-2008. London is a major location for Islamic finance and was named the third-biggest market in the world. Furthermore, a recent report from International Financial Services London (IFSL) noted that the UK was a key Western hub for Islamic Finance.

Duncan McKenzie, IFSL’s Director of Economics said: “The UK is the only western country to feature prominently in provision of Islamic finance and remains in eighth position with assets of $19 billion in a global ranking of sharia-compliant assets by country.”

Islamic banks in the UK

At present, 22 banks in the UK offer Islamic financial products, more than in the whole of Western Europe, including five UK-based fully sharia-compliant banks: the Islamic Bank of Britain (the UK’s first Islamic and only retail bank, established in 2004), the European Islamic Investment Bank, Gatehouse Bank, European Finance House and the Bank of London and The Middle East.

In December 2009, in cooperation with GSH Kuwait, Gatehouse acquired the UK headquarters of Procter & Gamble, one of the world’s leading pharmaceutical companies, for the bank’s clients for a total cost of £34 million.

This was the first acquisition by the bank's real estate team and, noted its CEO Richard Thomas, was “a clear indication that the UK remains an attractive investment environment for dollar based investors and we are confident that this will be the first in a series of similar investments.”

Islamic mortgage market

Apart from banks, the UK Islamic finance industry also includes an Islamic hedge fund and nine Islamic fund managers. Plus, it has the only Islamic mortgage market in Europe, which is eventually expected to rise from its current £700 million to £9 billion.

In January, international legal practice Norton Rose LLP hosted a seminar entitled New Year - New Opportunities in Islamic Finance. At the seminar, Sarah McCarthy-Fry confirmed the Government’s support for Islamic finance - as evidenced by tax law changes made through the Finance Act 2009 - in a keynote speech.

“Islamic finance 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,” she said. “With our depth of skill, experience and connections all around the world, we have ensured that the UK has long been the leading Western centre for Islamic Finance.”

The recent new measures have achieved cross-party support, something welcomed by Farmida Bi, Partner at Norton Rose LLP. He said: “It is extremely good news for the City of London that there is cross border support for the promotion of Islamic finance and that the helpful legislative changes that have been made will be continued.”