gif Financial Services Authority Guideline T
his did not, however, cater for retail
Muslim consumers, as the products devel- oped at the time were aimed exclusively at wholesale and high-net-worth investors. These products were relatively uncomplicat- ed in structure and fell outside the scope of the regulators.
Retail Islamic products first appeared in the UK in 1990s but only on a very limited scale. A few banks from the Middle East and South East Asia began to offer simple products such as home finance. However, these com- pared unfavourably with their conventional equivalents in several respects, including their generally uncompetitive pricing. Most of these products did not fall within the regulatory framework, so consumers did not have the same protection as other con- sumers, for example, the availability of the Financial Ombudsman Service and the pos- sibility of redress from the Financial Serv- ices Compensation Scheme. The growth of the retail market remained slow through- out the 1990s and early 2000s. Much has changed since then. Both on the wholesale and the retail side, the quality of products has improved; a wider range of products has become available; and more players have entered the market. Today, London is seen by many firms, including Islamic as well as non-Islamic, as an increasingly important global centre for Islamic finance. Some of the reasons are outlined below.
Reasons for growth There are, perhaps, six main reasons:
1. Global expansion of Islamic finance
The first experience of Islamic banking in modern times seems to have been in the Middle East in the 1960s.6 It is, therefore, a relatively young industry and nobody really knows the exact size today. But from a small base, the market size is now estimated to be about £250bn globally.7 There are also around 300 financial institutions around the world offering Islamic products.8 Not sur- prisingly, the growth of the industry in the Middle East and South East Asia has influ- enced the UK market. Initially, products cre- ated in the traditional markets were brought into the UK by some of the key industry play- ers, but now products developed in London are being marketed in other countries, for example in the Middle East.
48 Global Islamic Finance October 2010
2. Markets and skills base
London is well placed to take advantage of these trends. It has a tradition going back to the seventeenth century, if not before, of being willing to innovate and respond flexibly to new ideas. London has deep and liquid markets and the exchanges are among the most frequently used venues for listing and trading financial instruments globally. The London Metal Exchange has already been mentioned. The UK financial services indus- try has a proven record of developing and delivering new products and a large pool of legal, accounting and financial engineering skills on which to draw.
Several of these firms have now established or expanded offices in other Islamic centres. English law is already the preferred legal ju- risdiction for many Islamic finance transac- tions.
3. Islamic windows
Several major international institutions such as Citi, Deutsche, and HSBC have had a presence in the Middle East and South East Asia for several years. As a result, they have developed considerable knowledge and ex- perience of local markets, including Islamic ones. To accommodate the new and growing demand for Islamic products, they have es- tablished business lines known as ‘Islamic windows’, some of which are based in the UK and others in the Middle East and South East Asia. These windows have contributed significantly to the development of Islamic fi- nance because of the institutions’ global ex- perience in product development and their access to far greater resources than those available to local institutions in the Middle East and South East Asia.
4. Excess liquidity in the Middle East
The sharp rise in oil prices since 2003 has resulted in huge liquidity surpluses and a surge in demand for Islamic as well as conventional assets in the countries of the Gulf region. The capacity of the local finan- cial markets has not, however, been able to develop at the same speed. As a result, de- mand for assets has considerably outpaced supply and Middle Eastern investors have been looking, in large numbers, for suitable alternatives. This demand was quickly identi- fied by Islamic and conventional institutions
that now provide a channel through which assets within other markets are sold to these investors, often by way of Sharia- compliant transactions.11 This has been particularly notable in the UK. A recent example is the acquisition of Aston Martin by two Kuwaiti fi- nancial institutions, using Sharia-compliant financing.
5. Public policy and taxation
Since the early 2000s the government, for reasons of wider public policy, has intro- duced a series of tax and legislative chang- es specifically designed to remove obstacles to the development of Islamic finance. The first significant change came in the Finance Act 2003 which introduced relief to prevent multiple payment of Stamp Duty Land Tax on Islamic mortgages (see below).13 The Finance Acts 2005 and 2006 contained fur- ther measures aimed at putting other Islam- ic products on the same tax footing as their conventional counterparts. Most recently, the Finance Act 2007 clarified the tax frame- work further, in the case of Sukuk. This is very much work in progress.
6. Single financial regulator
Another contributory factor is institutional. The establishment of the FSA in 1997 com- bined 11 different regulators into a single body under a single piece of legislation. This has done much to resolve several of compli- cations and conflicting views stemming from the previous regulatory regime where func- tions were divided. In particular, the FSA is able to look across the system as a whole, to assess Islamic financial institutions and products.
Regulatory developments
As banking regulators, the Bank of England and, from 1998, the FSA have been open to the development of Islamic finance in the UK for some time. The first important signal was given in a speech by Lord Edward George, then Governor of the Bank of England, in September 1995 at a conference organised by the Islamic Foundation. In this, he rec- ognised the ‘growing importance of Islamic banking in the Muslim world and its emer- gence on the international stage’ as well as the need to put Islamic banking in the con- text of London’s tradition of ‘competitive in- novation’.
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