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Newsroom & speeches
20 January 2010
Thank you for the invitation to speak here today.
I’d like to talk to you about the importance of Islamic Finance in the future of financial services
The financial crisis and global downturn at the end of the last decade precipitated exceptional change in financial services, both in the UK and around the world.
Now, as we start a new decade, we must continue to learn and implement the lessons that will help us strengthen the financial services industry so that it is better able to serve our economy in future.
We will continue to pursue a regulatory framework that is an international benchmark.
And we will continue to pursue a consistent, politically neutral legal system that is widely used and understood globally.
Together, these will help reinforce confidence in doing business with the UK and in investing in the UK.
And these goals will help the UK to continue as a leading financial centre, one able to take advantage of growth areas in financial services, including the area I am here to talk about today - Islamic finance.
Being able to capitalise on growth areas and support their expansion will be hugely beneficial for the health of the sector in the future.
Support for growth areas relates to one of the lessons from the crisis – that we need a more diverse financial services sector.
Islamic finance is, and will continue to be, an important part of the Government’s overall commitment to ensuring a competitive financial services sector in the UK.
It is an area that has been helped by the openness to new influences and ideas that we have here in the UK, especially in London.
With our depth of skill, experience and connections all around the world, we have ensured that the UK has long been the leading Western centre for Islamic Finance.
We must also recognise that the strength of London and the UK as a centre for Islamic finance is underpinned by the vast professional services expertise at firms such as our hosts today, Norton Rose.
There are at present 22 banks offering Islamic financial products in the UK, including five that are fully Shariah compliant.
This means that there are more banks here offering Islamic finance than in the whole of the rest of Western Europe put together.
We also have an Islamic insurance provider, an Islamic hedge fund and nine Islamic fund managers.
And despite the impact of the global financial crisis, Islamic finance remains a growth sector around the world.
It is under conditions like the ones faced by international financial markets during the crisis and in its aftermath, that new opportunities for growth and development become increasingly important.
The issue of corporate sukuk by GE Capital in November, showed the continued appetite around the world for Shariah compliant finance. This was first listed on the London Stock Exchange, and brought the total number of sukuk listed in London to 20, with total funds raised of over $11 billion.
Worldwide, only the Dubai NASDAQ exceeds these figures.
The Islamic finance market presents huge long-term opportunities for London and the UK.
And it is a market that this Government would like to continue to nourish.
We will continue our discussions with other authorities and our work with industry to maintain the UK as a global gateway to Islamic Finance.
The dual objectives for our approach to Islamic finance remain:
And these objectives continue to be the driving force behind our engagement with the sector, and behind our efforts to create a level playing field for Shariah compliant financial products and their conventional equivalents.
Over the past five years we have made a series of reforms to establish a level playing field – in tax and regulation – between conventional and Islamic finance.
We have made some real progress, enabling the strong Islamic community here in the UK to access competitive Shariah compliant mortgages, Individual Savings Accounts – or “ISAs” as they are known – and Child Trust Funds.
These are major achievements.
And, since 2003, we have introduced a series of measures, which have facilitated the growth of the UK Islamic finance sector to its current status as the largest in the western world, and the eighth largest globally in terms of assets.
These measures have included:
And we continue to build on this progress.
Finance Bill 2009 introduced relief from both Stamp Duty Land Tax and tax on capital gains for any transactions undertaken as part of the issue of alternative finance investment bonds.
We also provided clarification on how the capital allowances regime interacts with these changes, providing greater certainty for issuers of corporate sukuk.
These measures were developed as part of extensive consultation with industry, and were warmly welcomed.
The Chancellor also announced further measures in the 2009 Pre-Budget Report, continuing to level the playing field and providing welcome clarification for retail customers of Islamic finance.
Specifically, we stated our intention to provide relief from tax on capital gains for alternative property refinance, subject to satisfactory safeguards.
The proposed change would allow those who own property that has appreciated in value to obtain additional bank finance in a Shariah compliant way, using the property as collateral. Such refinancing currently faces prohibitive tax barriers where principal private residence relief does not apply.
We also confirmed our commitment to create, as far as possible, a level playing field on VAT for retail consumers of Islamic finance products. This includes VAT guidance on corporate sukuk.
And in line with our efforts towards a level playing field on tax overall, HM Treasury and the FSA have been working to remove barriers and uncertainty in the regulation of alternative finance investment bonds.
Following constructive consultation with industry, the statutory instrument has now been laid before Parliament, and we are confident that the new regulations will come into effect by the end of February.
These measures will reduce compliance and legal costs for these instruments, and facilitate the issuance of corporate sukuk in the UK.
I know an area that is of particular interest to many of you is the issuance by government of a sovereign sukuk.
As most of you know, the Government announced in November 2008 that issuance of a sovereign sukuk at that time would not offer value for money.
I know that there was disappointment in the sector at our decision, but the decision was driven by a number of factors, including the conditions in world financial markets and the Government’s debt management policy.
Our policy is of minimising the long-term costs of debt issuance while taking into account risk.
The decision also took into account the size and nature of potential demand, the experience of other sovereign issuers, potential cost and risk characteristics, and the impact on the markets, among a wide range of other factors.
Contrary to recent speculation, our position on this matter has not changed, and remains that a UK Government wholesale sterling sukuk would not at present offer value for money.
But I would like to reiterate that this decision was taken after a lengthy consultation and after extensive consideration of a wide range of factors.
We will keep this judgment under review and revisit should factors change in such a way that sovereign sukuk issuance becomes more viable.
That said, we will continue to support the sector where appropriate, in particular via engagement on tax and regulatory issues through meetings such as the Islamic Finance Tax Technical Working Group, which I understand from officials is meeting for the first time in 2010 next week.
However, with a more mature financial landscape it is important that industry take the lead on a number of issues.
I am encouraged to hear of the progress that is being made towards a single and unified industry body, and my officials and I will appreciate the clarity and purpose this will provide.
It is important that this active and forward-looking approach is carried through in efforts towards standardisation in the industry; towards increasing awareness of the products and services on offer; and towards improving the skills already in the industry and reinforcing these as we move into the future.
As we move into the future I’d like to encourage the industry to seize the opportunities that the new financial landscape offers.
With the whole of the financial services industry taking stock of its actions and looking to rebuild trust, there are some key principles underpinning Islamic finance that could help shape this new landscape.
The rejection of certain speculative activities and the encouragement of an ethical approach to finance, to name a couple, could contribute significantly to the wider debate on the future of the financial markets.
And I’d like to see the sector grow in size and in influence- as I said at the outset, a more diverse financial sector will be better placed to provide businesses with the services they need for sustainable growth.
With the expertise and dedication that exists in this industry, I’m very optimistic that, working together, we can ensure a strong future for Islamic finance; ensuring that it plays a major role in the strengthening of the UK’s world-leading financial services industry.
