LONDON, 27 April 2007 — The UK Treasury confirmed that it is conducting a study to see how the British government could issue Sukuk (Islamic trust certificates) in the wholesale sterling market. The study would be completed next year, thus opening up the real possibility that Britain could issue its debut sovereign Sukuk in 2008.
Ed Balls, Economic Secretary to the Treasury, speaking at the FSA Principles-based Regulation Conference in London on Monday, said “there are great potential advantages for the UK government issuing Shariah-compliant debt. So I can announce today that I have asked the Debt Management Office and HM Treasury to carry out a feasibility study into opportunities for the government issuing Islamic financial instruments in the wholesale sterling market, consulting with our new Experts Group and reporting at the time of the pre-budget report.
“There is clearly a strong demand for Islamic financial services and transactions and many issuers have already accessed this market including sovereign issuers of Sukuk bonds such as Bahrain, Malaysia, Qatar and Saxony-Anhalt in Germany.”
The working group, Balls said, will examine the wider benefits from the issuance of Sukuk for the development of London as a center for Islamic finance in the context of the government’s debt management policy objective of minimizing long-term cost, taking into account risk, and examining the implications for gilt market structure and management.
“Because we are also keen to promote new ways for British Muslims to save,” Balls added, “I have asked National Savings and Investment (the UK Post Office) to look at the feasibility of the government becoming an issuer of retail Islamic products as part of the implementation of its new five-year strategy. This review will be complete by spring 2008.”
In March 2007, UK Chancellor of the Exchequer Gordon Brown, who is Balls’s boss, announced in his 2007 budget speech that the government had decided to introduce equal tax treatment for Sukuk with conventional bonds and for Diminishing Musharak home financing and Takaful (Islamic insurance) products.
Last week, Balls, who also doubles up as the minister responsible for the City (London’s financial center), hosted a summit of Islamic financial services “experts” at No 11 Downing Street, the first-ever such meeting to be held at the Chancellor of the Exchequer’s official residence.
The summit purportedly discussed the Budget 2007 measures with regards to the tax treatment of Islamic financial products such as Sukuk (Islamic trust certificates); Diminishing Musharaka (co-ownership) housing financing schemes, and Islamic insurance (Takaful). It also looked at how the business and Islamic community could continue to work with the government to drive Islamic finance forward in the UK.
Balls explained after that summit that “the UK is at the forefront of developments in Islamic Finance. I am keen to capitalize on the momentum gained in budget 2007 by listening to the industry and ensuring that the government takes every opportunity to promote innovation and growth in this area. By enhancing the competitiveness of the financial services sector, through creating a level playing field for Islamic finance products, we are also able to increase choice of, and access to, financial products for Muslims and non-Muslims in the UK.”
At that meeting, Balls also announced that the Treasury is establishing a new consultative forum, the “Islamic Finance Experts Group” to act as an industry sounding board for the government and the FSA on Islamic finance issues going forward.
The Treasury believes that Islamic finance is one area where greater co-operation between the government, the FSA and industry can further enhance the UK’s competitive position in the global financial markets — and at the same time serve the needs of British Muslim businesses and savers. Balls said the Islamic finance market has grown dramatically over recent years with Islamic finance assets worldwide are estimated to be worth over $250 billion and the number of Islamic financial institutions rising from just one in 1975 to over 300 today in more than 75 countries.
“London,” he said, “is already seizing these new opportunities. In the last couple of months alone we have made important strides — Sukuk has become listed on the London Stock Exchange and we are seeing a growing secondary market. At the same time the FSA has started regulating Islamic home financing, a market estimated to be worth 500 million pounds and one UK high street bank is now offering Shariah-compliant business accounts.
“We are determined to do everything we can to deliver greater opportunities for British Muslims — and also to entrench London as a leading center for Islamic finance in the world. We have already made considerable strides in reforms to taxation and regulatory policy in the last few years, including further reforms in Budget 2007,” he stressed.
The government’s aims for Islamic finance, according to the Treasury, are to continue the growth of the global wholesale Islamic finance market in the UK, as part of the City of London competitiveness agenda being pursued by the Chancellor’s High Level Group on city competitiveness and to create a level playing field in alternative finance and investments, such as Islamic finance, in the retail market.
“HM Treasury, the Financial Services Authority (FSA) and HM Revenue & Customs (HMRC) will together take forward this agenda and continue their strong and beneficial dialogue with the industry and the government,” the Treasury said.
This year, the government introduced a number of measures to promote Islamic finance. Budget 2007 introduced new measures for Sukuk, enabling them to be issued, held and traded in the same way as conventional corporate bonds. This, the Treasury said, is expected to increase primary issuance in the UK, and to further stimulate an already growing secondary Sukuk market in London.
HMRC similarly issued guidance alongside the budget on the treatment of Diminishing Musharaka (co-ownership), a common structure used for Islamic mortgages, and Takaful products, to provide more clarity and encourage growth in these markets. Banks such as Lloyds TSB, Royal Bank of Scotland, Islamic Bank of Britain, ABC International Bank and HSBC Amanah are all offering Shariah-compliant products, including the Islamic mortgage. Since 2003, the Islamic mortgage market has grown to over half a billion pounds — an increase of about 50 percent in the last year alone.
