By Andrew White
Why Sharia finance is on the lips of UK policymakers, businesses and private customers.
While the English may have invented cricket, rugby and football, sporting commentators will tell you that coming up with the discipline in the first place, does not guarantee pre-eminence in that particular field. The same wisdom, it would appear, also applies to the financial world - only this time, the English are the ones hastily adopting another's national sport.
From the corridors of power to high-street banks, Sharia finance is on the lips of UK policymakers, businesses and private customers. Islamic debt is an instrument to tap the Middle East's petrodollars, and non-interest-paying accounts are a way through which banks' financial services can be reconciled with the requirements of a particular client's faith.
UK Chancellor Gordon Brown, tipped by many as the man to succeed Prime Minister Tony Blair, is currently reeling from accusations that he knowingly blew a US$150bn hole in the country's pension pot. His critics - from within his own party as well as the opposition - have accused Brown of arrogantly dashing the hopes and dreams of a comfortable retirement of millions of ordinary taxpayers.
Nevertheless, the storm has failed to knock Brown off course in his hunt for a share of the booming Sharia finance market.
Changes to the tax system, unveiled in his most recent Budget, will potentially make the UK a key global centre in the development of Islamic finance - a market currently estimated to be worth over US$500bn worldwide. Previously, the UK tax system had been unable to ensure that the cash and transaction flows for a Sukuk were treated in the same way as those for bonds subject to interest payments.
The ‘rent' and ‘profit' flows on a building purchased through an Ijara Sukuk, for example, were taxed at a higher rate than it would have been if the same amount of return had been classed simply as ‘interest'. In effect, UK businesses or investors who wanted to adhere to Sharia law were being unfairly taxed simply for adhering to the demands of their faith.
Meanwhile, Lloyds TSB is to offer the UK's first business account by a high-street bank that complies with Islamic law. The accounts, offered throughout the bank's 2000-plus branches, will not pay interest, and money held in the accounts cannot be invested in blacklisted industries. The same bank has targeted the Muslim community with other Sharia-compliant financial products since 2005. Lloyds TSB already offers Islamic current and student accounts, and mortgage and investment funds, to its non-business customers.
Britain's Muslim community boasts over 100,000 businesses, a market that the Chancellor clearly feels has been inadequately catered to by the mainstream financial services offered on the high-street. Even non-Muslims are increasingly targeted, as Sharia investment is often peddled as ‘ethical' investment - that is, investment that will not be used to buy into gambling, alcohol, or pornography.
Overall, the changes should lead to a dramatic increase in the usage of Sharia financing instruments, and are intended to position the UK so that it might one day emerge at the forefront of the booming global Islamic finance industry.
In short, Brown's goal is for London to develop and sustain a level of market depth and sophistication that the Middle East has perhaps yet to attain - an achievement that would prove an awfully bitter pill for the emerging economies of the Middle East to swallow.
Islamic finance can co-exist alongside conventional finance, but the Middle East cannot afford to take for granted its place at the front of the field. With financial thoroughbreds such as London coming up on the rails, this race - which the Middle East surely cannot afford to lose - has a while to run.