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Newsroom & speeches
30 October 2006
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1. It is a pleasure to be here today, and can I thank Dr Mohan Kaul and the Commonwealth, Middle East and North Africa Business Forum for inviting me to speak this morning in this session on the opportunities for enhanced trade investment and economic stability between the Middle East and North Africa, the Commonwealth and Europe.
2. As the Economic Secretary to the Treasury with responsibilities for both UK financial services and wider international issues, my starting point is that we must do more to strengthen the bonds between the Middle East and North Africa and the UK - on trade, economic development and issues of mutual concern such as financial crime. I am looking forward to visiting the United Arab Emirates next week to discuss these issues.
3. As the Chancellor of the Exchequer has said, our aim is to ensure that Britain is a global centre for Islamic finance and trade. Indeed my first task as Economic Secretary was to ensure that we passed legislation in the Finance Act 2006 to enable borrowing by Islamic Business financed by borrowing against their premises, leasing their machinery, or entering into a finance arrangement with their bank. And I am working with industry to address the problems relating to Sukuk and other investment products.
4. This morning I want to take stock of the progress we have made and highlight the next steps we need to take to ensure that Britain remains at the forefront of trade with the Islamic world and continues to innovate in the provision of tailored financial products.
5. 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.
6. Islam is Britain's second largest faith, 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. I want in particular to thank the Muslim community for the enormous contribution you make to our economy. We have all learnt much from your entrepreneurial flair and talent. 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 this entrepreneurial vibrancy and dynamism of Britain's Muslims, combined with Britain's openness to the world and the historic ties with MENA countries, that makes the ambition we have set ourselves – to make Britain the gateway to Islamic finance and trade – a realistic ambition, one I believe Britain is well placed to realise.
9. Already, Britain is the largest European trader with many MENA countries - the largest European investor in Oman, the largest non-Arab investor in Egypt, and second largest global investor in Pakistan and Saudi Arabia; and as I will see at first hand next week, our trade with Arab countries has grown 60 per cent in the last five years; while at the same time our exports to North Africa grew to over £1 billion.
10. But I, like you, want to see Britain's strong economic ties with the MENA region strengthen still further.
11. Trade and commerce are the foundation for economic growth and long term prosperity - for Britain and all countries. It is increasing world trade - growing over the past two decades at twice the rate of output - that is driving the transformation of the global economy.
12. But it is also through trade and economic cooperation that we bring peoples and countries closer together.
13. I know we are all resolutely committed to rooting out violent extremism wherever it is from and terrorism from whatever source. But if our relationship with the Muslim world is too often described through a prism of conflict and tension, the much broader and deeper relationships that have existed between Britain and the Muslim world through migration, shared knowledge - such as Islam's contribution to scientific development - and of course good trade relations are also too often underplayed. Yet I am aware that it was through trade that the faith of Islam arrived in many countries throughout the world.
14. So I want to set out today what we - together - need to do to realise our shared ambition of enhanced trade and economic partnership that today’s conference has set.
15. First – we need to embrace the challenges and opportunities presented by globalisation. I welcome the substantial progress we have made over the past twelve months towards an EU and Gulf Cooperation Council Free Trade Agreement - and we will do what we can to secure the completion of the negotiations.
16. We also welcome progress made in the G8 Broader Middle East and North Africa Initiative, which allows us to work together to stimulate investment, growth and jobs. This is an initiative that was taken forward during our Presidency of the G8 last year. And I am delighted to see that countries in the region have now grasped the opportunity to lead this important initiative, with the support of the G8, and I look forward to further progress being made at the G8 BMENA Forum for the Future conference, which is to be held in Jordan at the end of November.
17. And because globalisation and trade offer the best hope for both the developed world and developing world to increase growth and alleviate poverty, it is in all our interests that we do all we can to break the world trade talks deadlock.
18. The UK is very disappointed that the DDA negotiations have been suspended. However, this does not mean that the round has failed. We - like many other WTO members - hope the negotiations can be restarted at the earliest opportunity and want to make substantive progress.
19. Time is not on our side, but we have to show leadership. All countries stand to benefit from further trade liberalisation, and the UK urges all key players, especially Europe, America, India and Brazil, to work to discover where there is common ground and to make urgent progress for an early resumption of the trade talks.
20. To secure a world trade deal, heads of government should stand ready to use all the resources of leadership and statesmanship. The prize is a 50 per cent increase in world trade - and specifically the World Bank estimates a deal could bring $14 billion in increased prosperity to the Middle East and North Africa.
21. Second, we must strengthen the bonds between the Middle East and North Africa and the UK, through dialogue and trade. It is by increasing the exchange of information, trade and investment, between Muslim countries and the UK, that we can provide the growth and stability to let our economies prosper.
22. In my earlier roles in Government, I contributed to discussions with representatives of the region both at the IMF, where I chaired meetings of the IMFC Deputies, and through the development of the G20 – a forum which allows dialogue on current global economic issues between the world’s major industrial and emerging market powers including Saudi Arabia.
23. Our bilateral economic relations are increasingly important. In the Budget this year, the Chancellor announced proposals for a revamped UK Trade and Investment organisation and new targets for expanding trade with emerging economies. And with 35 UKTI offices in Muslim countries across the world, boosting Islamic trade will be an important element of this. I am looking forward next week to discussing the economic relations between the UK and Middle East with colleagues in Dubai and Abu Dhabi.
24. At the Treasury we are also involved in broader issues of common concern. All countries face a terrorist threat that it is indiscriminate in seeking to cause mass casualties, regardless of age, nationality, or the religion of their victims. So we are working together to ensure that there is no hiding place for those who finance terrorism.
25. I am delighted that UK technical assistance to combat terrorist finance is helping to build capacity across the MENA region. And next month, the Middle East and North Africa Financial Task Force will meet in Qatar, with the UK as an observer, to discuss the regional fight against terrorist finance – and play its role in raising financial standards to combat terrorism world-wide.
26. In addition, Government funds work by the Charities Commission with governments across the Middle East to share experience on the regulation of non-governmental organisations. For example, next month, as a joint initiative in partnership with the United Arab Emirates Social Affairs Ministry and Central Bank, the Charities Commission will participate in a training workshop for officials from around the Gulf on NGO regulation.
27. And also making our contribution to wider efforts for peace and prosperity in the region. As the Prime Minister and the Chancellor have both stressed in recent weeks, it is imperative that we re-energise the Middle East peace process, and the political roadmap needs to be underpinned by an economic roadmap addressing the profound economic problems afflicting the occupied territories, such as poverty and unemployment. Through this, we can not only illustrate to both the Israelis and Palestinians the true dividend of peace and thereby support a lasting settlement, but also address possibly the greatest grievance among moderate Muslims around the world. To this end, I am continuing work with my Treasury colleague Jon Cunliffe, commissioned by the Chancellor last year, to look at ways the international finance community can support Palestinian economic development once political progress is achieved – and we will be making our third visit to the region on this project around the turn of the year.
28. At the same time as the work we can do together globally and regionally, we also want to do more to make Britain the gateway to Islamic trade and the City a global centre for Islamic finance.
29. The City today is widely seen as one of the world’s only two truly global financial centres. It is the natural 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.
30. There are currently in the region of £250 billion of funds within the Islamic finance system, forecast to grow at 15% annually. And the City of London is well placed to play a leading role in this market.
31. Our unique qualities - our geography, our stability and openness to the world, our inventiveness and flexibility - have given the City of London its historic advantage, the first mover advantage, of already being, along with New York, the leading global financial centre for established markets.
32. London is also increasingly the location of choice for emerging markets - from India and China, to Eastern Europe, and the Middle East and Muslim countries all over the world.
33. 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.
34. 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.
35. London is increasingly a centre for international Islamic finance. We have the only independent Islamic investment bank operating in Europe – the European Islamic Investment Bank - as well as conventional investment banks such as Deutsche Bank with strong Islamic advisory arms. I am proud that the largest Sukuk (or Islamic bond) issued to date was written out of the London office of Barclays Capital.
36. At the same time banks in Britain are pioneering Islamic banking - London now has more banks supplying services under Islamic principles than any other Western financial centre.
37. These include the fully Shari’a compliant banks such as the Islamic Bank of Britain - the first independent Islamic bank in Europe who now have 7 branches across the UK; but also well known retail banks such as HSBC, Lloyds and Bristol and West. Lloyds is offering Islamic products across all of its branches, including a student account launched this summer.
38. As Islamic finance spreads in both the wholesale and the retail markets, it becomes all the more important that we continue to work with the FSA to modernise the tax and regulatory framework, to ensure that it keeps pace with innovation.
39. In the retail markets, we want to ensure that the regulatory and tax treatment is fair for consumers of Sharia compliant (non-interest bearing) products.
40. Regulation can play an important role in protecting consumers and strengthening market confidence. We are committed to tackling barriers that may hinder the development of these products.
41. That is why we introduced changes to bring Ijara home financing arrangements into the scope of FSA regulation. The changes ensure that all consumers of these products will benefit from FSA protections, and that there is a level regulatory playing field in the Islamic home financing market.
42. We will continue to work with the FSA to modernise the regulatory and tax framework to ensure that it keeps pace with opportunities in markets where the UK is traditionally strong, along with new and innovative areas such as Islamic finance.
43. We are equally committed to providing a fair tax regime for Islamic financial products. We have made good progress in this regard. Over the past 3 years we have:
44. All these changes are vital to increasing trade with Muslim countries and making London the location of choice for Islamic investment, but they are also vital to ensuring the Muslim community in Britain can trade, build successful businesses and create jobs.
45. British professional services firms are leading the way in Islamic business services - with English commercial law now the law of choice. Last year A&O advised the investment banks on the DP World sukuk, Clifford Chance and Norton Rose helped Etisalat with their recent $3bn financing and Norton Rose advised Emirates Telecommunications Corporation on their Islamic bridge finance facility for its purchase of a 26% stake in Pakistan Telecommunication Corporation.
46. But there is more to do to release the full potential of Islamic finance so we are now looking at international finance – sukuk. Now that 85% of all bonds issued in the GCC are sukuk it is important that London is in a position to compete. We are looking to place domestic sukuk on the same footing as conventional products.
47. Due to the transparent structure of the SPV we need to ensure that the correct tax treatment applies for Capital Gains Tax, Capital Allowances and Corporation Tax. We will be working with industry over the coming year to find a solution to the tax problems presented by sukuk and ensure that London remains competitive in this market.
48. But that is not all, I am aware that there are still barriers remaining for small Muslim businesses in the UK. I can now announce that we will extend the current Community Investment Tax Relief scheme to include Islamic finance products, improving access to business funding.
49. And I welcome the development of Shari’a compliant business finance products - such as Business Finance North West's Ethical Fund - enabling Muslim entrepreneurs to generate the capital they need for a business start-up or expansion.
50. Where possible within European VAT rules the government has sought to treat Islamic finance products on a par with conventional finance, and has ensured that many of the Islamic finance products currently on the market receive equal VAT treatment. Where the existing VAT rules potentially create difficulties we will continue to work with other EU states to review the VAT treatment of Islamic finance.
51. I look forward to the conclusions of this conference, and hearing your ideas, as we continue to work together on this agenda. I would be particularly interested to hear the views of participants today on the scope for standardisation of sukuk documents and the work currently going on in the International Swaps and Derivative Association (ISDA).
52. At the very heart of all this work is the theme you have chosen today - bringing countries and peoples closer together through trade and economic cooperation.
53. That is why today's conference is a landmark event - and why I am pleased to join you in advancing from today onwards the ambition for Britain to be a global gateway for Islamic finance and trade.
54. Let me thank all of you here for what you are doing to make this vision a reality.
55. Thank you.
