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UK Budget Places London At Centre Of Islamic Finance

by Robert Lee,, London

23 March 2007

Chancellor Gordon Brown's announcement that the Islamic finance industry would be given the same tax treatment in the UK as other investments has been applauded by tax and finance experts, who say the move puts the City of London at the forefront of the nascent but rapidly growing global industry.

Brown's 2007 budget introduces two key measures to encourage growth in Islamic finance, namely a new regime for sukuk (Islamic securitisations) giving comparable tax treatment to conventional securitisations, and guidance clarifying the treatment of diminishing musharaka (partnership share) and takaful (insurance) products.

Commenting on the move, Darshan Bijur, Director, KPMG Islamic Finance Advisory, said this new legislation has created the framework for London to emerge as undisputed global leader in the Islamic finance industry.

“Sukuk will be the equivalent of Eurobonds, and the likely exponential growth in UK Sukuk issuance will ensure that Islamic finance moves from niche to the mainstream," he observed. “It will cost the UK next to nothing, and opens up the way for UK companies to access Islamic finance, and the Middle East wealth that has been generated by oil."

Peter Muir, tax partner at Deloitte, says that the Chancellor should be applauded for his reforms, which will benefit both the Muslim and non-Muslim investment communities.

"The UK is the only country which is changing legislation to create a level playing field for both individuals and companies investing in Islamic finance products," he noted. "Reform of sukuk (Islamic bonds) is the latest addition to the suite of specific legislation that gives certainty to the taxation of Islamic financial products. Before this reform was introduced, there was ambiguity around how capital gains tax, income tax and capital allowances would apply to these products."

Muir added: “Gordon Brown seems to have taken a personal interest in ensuring Islamic products are brought into a level playing field. This is intended to meet the financial needs of the Muslim community as well as, increasingly, non-Muslim investors in these products."

"From a capital markets perspective, the reforms are a boost to the City of London, improving its global competitiveness in the Islamic finance market. Notably, the measures reach out to a potentially much wider group of international exchanges who can be given tax recognition in the UK in relation to ‘sukuk’ bonds.”

Mohammed Amin, tax partner, PricewaterhouseCoopers, said that Sukuk have become increasingly important in the Muslim world, as companies prefer to obtain finance directly from international investors.

"While London-based lawyers and bankers regularly structure and market sukuk for companies from Muslim countries, until today tax uncertainties have precluded them being issued from the UK," he stated. “The changes announced should enable the City of London to become the global centre for international sukuk issuance and trading, in the same way as it dominates the eurobond market. There should also be scope for mainstream UK companies to issue sukuk to both Islamic and conventional investors.”

Under Shariah law certain investment practices commonplace in the world of conventional finance are prohibited, the charging of interest a notable example. This is because Shariah law dictates that risk in trade and business should be shared and the accumulation of wealth through "effortless" profit is frowned upon. Islamic finance doctrine also states that investment in certain business activities deemed unethical are forbidden, such as those involving the selling of alcohol, tobacco, pornography, armaments and gambling services.

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