At a time when the Government’s desire to be tough on terrorism has witnessed a series of events that have increased tensions between it and the UK’s Muslim community, it is heartening to see continued Government support for one success story: the growth of London as a centre of excellence for the development of the Islamic finance industry.
At the recent inaugural Islamic Finance and Trade Conference, held under the auspices of the Muslim Council of Britain, the Chancellor of the Exchequer delivered a keynote speech to an audience of finance professionals. The event was designed to emphasise the deep financial and commercial relationships existing between the UK and Muslim-majority countries across the world, and further illustrate how the UK is setting the pace as an ‘Islamic finance-friendly’ country in which to do business.
Islamic finance techniques, based on contracts commonly found in trading activities, do not always sit easily in high-tax Western economic models when transposed from low-tax (or nil-tax in some cases) Muslim-majority countries.
Under pressure, and with concerted lobbying by representatives of the Muslim community and the financial community of the City of London, the Government has improved the fiscal framework for Islamic finance in the UK. This started with the Finance Act 2003, was extended by the Finance Act 2005 and more is to follow when the Finance Bill 2006 shortly receives Royal Assent.
The first hurdle overcome was the adverse impact that double stamp duty land tax had on real estate transactions. This relief, initially only granted to individuals for residential home finance, is soon to be extended to all commercial enterprises, and we can expect to see a growth in sharia-compliant commercial property finance in the near future. The 2006 Finance Bill has also introduced the principle of achieving a level playing field in the tax treatment of Islamic financial techniques, and following Royal Assent the Treasury will have the power to make further changes by regulation, rather than waiting for primary legislation.
In implementing these favourable tax changes, the Treasury has ironically made the UK an easier place to undertake sharia-compliant real estate finance than in many Muslim-majority countries, where the double stamp duty problem still exists. Throughout these developments the Treasury has been concerned to ensure that, in following this path, it does not inadvertently create any tax avoidance opportunities, and to date it seems unlikely that such problems will cast a shadow on what has been achieved. However, if London is to maintain its status as a gateway for Islamic finance, further measures will need to be taken to ensure, on the one hand, the affordability of these products for its UK residents, and on the other, to make the techniques more appealing for potential corporate users.
While the abolition of double stamp duty and the lowering of mortgage down- payments from bank providers have increased opportunities for those on lower incomes, more needs to be done to enhance accessibility to these sharia-compliant products. A review of Law Society Rule 6, presently a cause of heightened legal fees for those using diminishing musharaka home-finance products, would be a welcome step forward. The legal profession cannot be expected to underwrite the inherent conflicts arising from Rule 6 and the Law Society has made it clear that the impetus for any change needs to come from government. With a young Muslim population (20 per cent of whom are aged between 16 and 24), the accessibility issue will only become more prevalent if left unaddressed.
The ability to issue Islamic bonds (sukuks) would be a major benefit to the corporate sector. The HM Treasury Islamic Finance Technical Group is examining the treatment of sukuk products, capital allowances in property finance products and Islamic derivatives (the latter being an emerging technique aimed at providing certainty in a maturing market).
In driving forward constructive changes in these areas, let us hope further initiatives follow to enhance relations between Muslim and non-Muslim communities in the UK.