London has welcomed the Islamic finance industry with open arms. The British capital is already popular with savvy Gulf investors, but its burgeoning Islamic banking offerings have rolled out an extended red carpet for Middle East clients wanting to invest in London.
From sukuk to Islamic mortgage to Gulf property investment, the tweaked changes to the United Kingdom tax regime a few years ago have helped these markets blossom. The changes allowed UK tax laws to fit around Islamic banking rules, and the industry established a strong foothold in the country.
Extending the Islamic finance industry charm, there is now talk of the UK government reviving plans to issue a sovereign Islamic bond, or a “sukuk.” This would potentially make Britain the first Western country to do so, proving that the UK is not letting go of its place at the top as a key Western hub.
Islamic funds managed in the UK have combined assets of a sizeable $300 million, while emergent sukuk listings are growing steadily.
London has five Islamic banks, with most of the conventional banks in the City also providing a Sharia-compliant offering. They provide expertise on structuring financial derivatives, underwriting sukuk, and developing trade finance. The UK as a whole has 22 banks that offer Islamic finance products, exceeding that of any other Western country, according to TheCityUK.
Before the financial crisis, the UK government had announced robust plans to issue a government sovereign sukuk.
Broadly, sukuk are a broad class of Islamic financial certificates designed to replicate the economic function of bonds, or sovereign bonds in the case of a sovereign sukuk.
“The infrastructure is ready in the UK to issue sovereign sukuk,” said Nigel Denison, executive director and head of Markets and Asset Management at the Bank of London and the Middle East (BLME), mentioning the presence of corporate sukuks in the UK.
“The only frustrating thing is that since we’ve had an election a year ago and a change of government, the issuance of this sukuk doesn’t seem to be as far up on the political agenda as it was a few years back. But it is still being considered,” added Mr. Denison.
A sukuk evades the traditional Western interest-based bond structure, which is not permissible by Sharia law. The issuer of a sukuk sells an investor group the financial certificate, which then rents it back to the issuer for a predetermined rental fee.
There were five sukuk listings at the London Stock Exchange (LSE) in 2010 and one in early 2011, bringing the aggregate total at the LSE to 31 listings worth a substantial $19 billion, TheCityUK reported.
Since 2003, a number of finance acts have passed through parliament to help Islamic finance integrate with UK banking operations and advance in the country.
“Many of the tax changes were brought in to treat Islamic finance in a similar way to conventional finance, and that’s a big deal,” said Mr. Denison.
The changes addressed a variety of tax and regulatory barriers, such as making changes on stamp duty for the buying of property and the ironing out of tax problems in connection with the issuance of sukuk.
Stamp duty, a tax on the purchase of UK property or shares, had clashed with Islamic mortgage structures.
Within the Islamic mortgage process, the ownership of a property changes twice to evade conventional interest-based mortgage lending. The twice-changing ownership had meant that the stamp tax would also be charged twice. However, the UK government brought in rules to harmonize this, and allowed Islamic mortgage buyers to be taxed just the one time.
In a city where property is a popular asset class amongst Middle East investors, London welcomed this tax change—and the UK market continues to see strong demand for property investment.
Deals in Britain include the purchase of the UK headquarters of Procter & Gamble from Prupim, the property investment arm of Prudential, for a syndicate of Gulf investors. Also, the purchase of InterContinental Hotel Group’s global headquarters in Uxbridge for a group of Gulf investors, the Financial Times reported.
“Property is still the asset class of choice for Gulf investors,” said Mr. Denison at BLME, the largest Islamic bank in Europe by assets and capitalization.
“Despite the fall in some property prices in the UK over the last two to three years, [estimates say that on average UK house prices fell about 20 percent from peak to trough] Central London hardly moved. There were a few months where people recorded very small downturns but it never really went down anything substantial. Central London prices are now going up quite sharply again,” he said.
Mr. Denison cited developments in the Capital such as One Hyde Park, a Qatari-backed luxury residential development that was recently reported to have achieved a £1 billion ($1.6 billion) sales milestone.
By adjusting tax laws and welcoming Islamic finance-supported capital, the UK government has allowed property to remain a strong investment player in London, while the possible introduction of a sovereign sukuk will only boost the UK’s Islamic finance rankings.
As the industry transitions from niche into mainstream, the UK will have to decide whether it will carry on rolling out the red carpet for Islamic banking. The country has done well by Islamic finance thus far.
(Eman El-Shenawi, a writer for Al Arabiya English, can be reached at: email@example.com)