LONDON (AFP) - The government is set to announce plans for legislation that would make it the first western country to allow banks to sell Islamic bonds.
According to the Financial Times, City Minister Ed Balls will tell a conference of investors that the bill is due to be published along with the annual budget, which is due out in either March or April.
The bill "is an example of public and private sectors working together to fulfil our shared ambition of creating major international markets in Islamic finance with London as their centre," Balls was to say, the FT said Tuesday.
The legislation will allow British-based financial institutions to sell Islamic bonds, or sukuk, which conform to the religion's prohibition of paying interest and investment in businesses linked to the alcoholic drinks and gambling sectors.
Companies that have issued Islamic bonds make payments to investors using profits from the underlying business, instead of paying interest, according to the newspaper.
The FT said that the Islamic bond market is worth 45 billion dollars (35 billion euros), in terms of outstanding bonds.
The proposed reform will allow issuers of Islamic bonds to offset the "interest" payments made against their corporate tax bills, as are issuers of regular corporate bonds, the FT reported.
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Ed Balls [Economic Secretary of the Treasury, U.K. ed. A.I.] announces support for Islamic finance
The Economic Secretary, Ed Balls, today set out new measures to establish the UK as the financial partner of choice for emerging markets and a leading global centre for Islamic finance. In his speech to the Euromoney Annual Islamic Finance summit, Ed Balls argued that Government has a role in helping industry overcome barriers to the development of Islamic Finance in the UK.
In order to support the development of Islamic financial products, the Government today announced:
- Legislation in Finance Bill 2007 to facilitate the UK issuance and trading of Sukuk;
- Guidance on Diminishing Musharka and Takaful to be published alongside the Budget; and
- Islamic finance will become a key priority of the work of the Chancellor's High-Level Group.
The Government also welcomed industry developments, including:
- A Memorandum of Understanding signed today between the International Capital Markets Association and the International Islamic Financial Market to set standards for Islamic Capital Markets; and
- The launch of the Islamic Finance Qualification in October, a joint initiative between the Securities and Investment Institute, and the Ecole Superieure des Affaires, one of the leading business schools in the Middle East, to develop qualifications in Islamic Finance.
Ed Balls said:
"Today I am able to set out the next stage in our reforms to ensure the tax and regulatory system will encourage the development of Shari'a compliant products. I am pleased to be able to outline these reforms alongside the announcement of a Memorandum of Understanding to help set standards for Islamic capital markets. Today is an example of public and private sectors working together to fulfill our shared ambition of creating major international markets in Islamic finance with London as their centre."
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Speech by the Economic Secretary to the Treasury, Ed Balls MP, to the Euromoney Conference on Islamic Finance.
1. It is a pleasure to be here today, and I would like to begin by thanking you for inviting me to speak at this conference about the steps we are taking to cement Britain's role as a global centre for Islamic finance and trade. I would also like to celebrate today's landmark agreement between the International Capital Market Association and the International Islamic Financial Market which will help secure the long-term future of the Islamic finance market.
2. The City today is widely seen as one of the world's two truly global financial centres. It is the location for 70% of the global secondary bond market, over 40% of the derivatives market, over 30% of world foreign exchange business, over 40% of cross-border equities trading and 20% of cross-border bank lending.
3. And as Islamic finance grows in importance, we want to see more of this business coming to the UK. There are currently in the region of £250 billion of funds within the Islamic finance system, growing at around 15% annually. And there are encouraging signs that London is playing a growing role in these fast growing markets.
4. Since 2003 the Islamic mortgage market in the UK has grown to over half a billion pounds - an increase of almost 50 per cent in the last year alone. And when Dubai Ports wanted to issue what was at the time the largest sukuk ever completed, they turned to Barclays Capital to help provide expertise.
5. So this morning I want to examine the market and highlight the challenges On the road ahead, to look at the steps we - both business and Government, need to take to ensure that Britain remains at the forefront of developments in Islamic finance and continues to innovate in the provision of tailored financial products.
6. I want to start by recognising and celebrating the invaluable contribution of the whole of the Muslim community in Britain - to our prosperity, our society and our culture. Islam is Britain's second largest faith, The UK's Muslim population is currently in the region of 2 million people and Muslims are involved in every walk of British life - from politics, academia, law, the arts and social services to humanitarian aid work, business and finance.
7. It is a fact that business creation is higher in the Muslim community than in many other sections of our society, and I know that British Muslims are playing a vital role in the next stage of Britain's economic development.
8. And it is the entrepreneurial vibrancy and dynamism of Britain's Muslims, combined with Britain's openness to the world and the historic ties with Islamic countries, that makes the ambition we have set ourselves - to make London and Britain the financial partner of choice for Muslim countries all over the world - as well as for emerging markets from India and China, to Eastern Europe - a realistic ambition, one I believe Britain is well placed to realise.
9. London's advantages include the critical mass of financial markets; its innovative, skilled and large labour force; efficient technological infrastructure; a level playing field for foreign firms; competitive personal and corporate taxation; world-class regulation; and a global outlook and commitment to bringing the best talent from round the world to work in our financial markets.
10. Some in Britain feared that the challenge of globalisation, the emergence of other major financial centres and new technologies, and the switch from physical to virtual trading platforms would threaten London's place in the global economy. The fear was that increased international competition would slowly erode London's stature as a geographical financial services cluster.
11. In fact the opposite has been true - London has not stumbled, but prospered. Far from weakening London's standing, global financial integration and the emergence of new economic powers and regional financial centres have all strengthened the importance of London as the best partner for financial centres round the world.
12. Today London is the world's leading international financial centre. Its scale, scope and internationalism are unparalelled. As Europe's leading financial centre, London also acts as Europe's gateway to financial markets.
13. But we are not complacent about London's success. With globalisation and the rapid pace of change, we know that this success could reverse quickly if we get things wrong. That is why the Chancellor set up our High level Group, bringing together Government and the UK based financial sector, to develop and provide direction to a new coordinated strategy to help ensure the future success of our financial services industry and to extend our global reach even further.
14. The High Level Group met for the first time in October and we agreed to take forward proposals in areas that are critical to our competitveness.
15. These key proposals include modernising the wholesale insurance market - Lloyd's Chairman Lord Levene is working with key players in the London wholesale insurance market, including Grahame Millwater from Willis Re and Andrew Kendrick from Ace European Group, to develop a plan to deliver further market reforms to improve efficiency. And we are examining the business environment in parallel.
16. We're also looking to boost professional financial skills. The Chancellor asked Teresa Sayers and the Financial Services Skills Council to undertake research on financial skills gaps, and we hope to have the interim results by March. At the same time the Treasury, together with industry, will examine a proposal for a centre for regulatory expertise that would provide teaching and research. This is being taken forward by a working group chaired by Lord Currie.
17. And we're seeking to bring a more strategic approach and better coordination to the efforts of the public and industry bodies that promote the UK based financial sector in overseas markets. UK Trade and Investment is responsible for coordinating this promotional strategy and they are allocating additional resources to the promotion of financial services, recruiting dedicated diplomatic staff and developing tailored promotional strategies in key overseas markets, including China and India.
18. Last but by no means least, in view of the fact that the regulatory environment is viewed by many in the industry as world-class and one of London's key attractions, we are committed to maintaining cutting edge principles based regulation for the financial sector, including reducing the administrative burden and working to prevent unnecessary gold-plating of European Directives. The FSA is planning to reduce the size of the conduct of business rulebook by half before the end of the year as it moves towards more principles based regulation.
19. It is for this reason that I firmly endorse the FSA's risk based approach to regulation - something which I know you will be discussing with the FSA at this conference tomorrow.
20. At the same time we have to safeguard our regulatory system for financial services with the Investment Exchanges and Clearing Houses Act which gives the FSA a power of veto over excessive regulatory provision proposed by our recognised bodies.
21. As I said when I visited Dubai in November our aim is to ensure Britain is a global centre for Islamic finance and trade and a strong partner for growing financial markets in the Middle East, North Africa and other Muslim countries around the world.
22. So let me set out today what we have achieved to date and give you an indication of our future thinking.
23. Since the Bank of England's first Working Party in 2002 and Finance Act 2003, when this Government started shaping the tax and regulatory framework to allow for the development of Islamic finance products, the market has grown from strength to strength.
24. London now has more banks supplying services under Islamic principles than any other Western financial centre. There is strength in Islamic finance across the whole financial spectrum.
25. There is undoubted strength in wholesale banking, with banks such as Standard Chartered, Barclays and Deutsche Bank having strong Islamic offerings. The largest sukuk to date, the $3.5 billion convertible issue by DP World last year, was written out of London.
26. We have mainstream banks such as HSBC and Lloyds TSB offering Shari'a compliant products in all their branches.
27. We also have fully Shari'a compliant retail banks such as the Islamic Bank of Britain - the first independent Islamic bank in Europe who now have 8 branches and 30,000 customers across the UK.
28. We have regional building societies offering products such as the Shari'a compliant Child Trust Fund offered by the West Bromwich Building society.
29. And finally we have organisations like Ansar Finance in Manchester providing loans and investment opportunities to the local Muslim community.
30. But as with any rapid expansion there are challenges to be overcome. Structural challenges are facing the market. The lack of standardisation is hindering liquidity. It prevents investors from knowing what risk they are assuming when they invest and increases the costs associated with sukuk issuance.
31. Increasingly it is negotation and regulatory decisions being taken at the global level that have a major bearing on the competitiveness and efficiency of our financial markets.
32. Increasingly globalisation calls for increased co-operation and, over time, where appropriate, convergence in global standards. There should be no competition between us on the objectives of regulation.
33. So I welcome initiatives led by the industry such as the signing of the Memorandum of Understanding between the International Capital Markets Associaton and the International Islamic Financial Market that we have witnessed this morning. The Memorandum of Understanding will seek to set standards for developing Islamic capital markets. I know that both ICMA and IIFM are committed to working with their respective constitiuencies to develop best practice and common high standards aimed at underpinning the efficacy of Islamic financial market activity. Co-operation such as this is aimed at supporting the development of liquid international bond markets and London will continue to play a major role in its development.
34. And it is for this reason that I welcomed the launch of the world's first internationally recognised Islamic finance qualification on 31 October last year. It marked the fruits of a long cooperation between the Securities and Investment Institute of London and the Ecole Superieure des Affaires of Lebanon. I also support the focus on educational activities which will be taken forward by the ICMA Centre at the University of Reading as part of this Memorandum of Understanding. As I have already set out, we are examining possibilites for a centre of regulatory expertise as part of the work of the High Level Group and I am pleased to note that John Board, Director of the ICMA centre, is a member of the working group looking at this proposal.
35. Within Government we have come a long way in our work on Islamic finance. We modified the tax system to cope with Islamic home finance, retail banking and commercial finance. My very first task as Economic Secretary was to ensure that we passed legislation to enable borrowing by Islamic businesses against their premises, leasing their machinery, or entering into a finance arrangement with their bank.36. In 2003, we removed the double stamp duty land tax charge on murabaha and ijara based mortgages. Enabling at a stroke the explosion in Islamic home finance.
37. After informal consultation through 2004, in 2005 we legislated to bring the final forms of Islamic mortgages within the regime created in 2003. We also addressed the issue of both mudaraba and murabaha transactions - facilitating the creation of a fuller service retail banking sector.
38. And as I have mentioned, last year we addressed business finance - legislating for diminishing musharaka, ijara wa iqtina and wakala products. We also extended the property reliefs to include commercial property - enabling Muslim businesses the same capital flexibiility enjoyed by their counterparts.
39. However we are aware that there is more for us to do. We are currently looking at the how the tax system interacts with the sukuk market - what barriers there are to establishing a secondary market in the UK; what barriers in the way of UK issuance and how UK holders are taxed.
40. I can announce today our intention to set out in the Budget what a tax framework for sukuk will look like and what the consequences would be for any London market. Detailed legislation will follow in the Finance Bill. Alongside this statement on sukuk, HMRC will be publishing guidance on how diminishing musharaka products will be treated for Capital Gains and Capital Allowances. This will provide certainty of interpretation. Similarly, HMRC plan to clarify uncertainty in the market over the tax treatment of takaful products by publishing guidance on how these products will be taxed within the current rules.
41. And looking to the future I am aware that there are outstanding issues with regulation. We have successfully extended the FSA's mandate to cover Islamic mortgages, but there is more to do. I look forward to taking this agenda forward in partnership with the FSA over the coming months.
42. The objective of all our work is to enable the market to develop and flourish. To help the Islamic finance industry go from strength to strength.To cement London as one of the global centres for Islamic finance.
43. So, to conclude, we have many challenges ahead, but it is through your continued support that we will succeed. Our task is to build on our platform of stability, to foster economic growth and maintain the competitive position of the financial services sector.
44. Let me thank all of you here for what you are doing to make this vision a reality.
45. Thank you.
Pertinent Links:
1) Gov't to propose law allowing banks to sell Islamic bonds
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