It was the rate cuts that grabbed the Budget headlines with much debate and
comment around whether 2% was enough to restore the UK’s tax competitiveness and
who would be the winners and losers.
Amid all this, the real story about the UK’s competitiveness on the world
stage was perhaps missed.
Gordon Brown announced measures that potentially open the floodgates for up
to $400bn (£202bn) of oil-fuelled funds from the Middle East to invest in the
Many investors from the Middle East can only put their money into Shariah
compliant funds. They have thus been restricted to what is on offer.
Due to an anomaly in the tax system, “Sukuks” (Shariah compliant vehicles
similar to conventional bonds) are very expensive to invest in. The reasons are
technical but essentially this is because income streams derived from a Sukuk
investment are classed as “rent” or “profit” by HMRC and, as such, are subjected
to a much higher tax charge than “interest” on a conventional western bond.
This deters businesses or investment houses whose underlying activities might
be acceptable to an Islamic investor from issuing Sukuks.
Last week the chancellor proposed legislation that will level the tax playing
field and make it economic for UK businesses and investment houses to issue
There is huge appetite in the Middle East to diversify their investments. The
paucity of Shariah compliant vehicles has meant that these funds have largely
been limited to investing intra-region in the Middle East.
This geographic limitation is further compounded by the narrow range of
sectors available to them – oil and gas, real estate or local infrastructure.
Such a portfolio – lacking both regional and sectoral diversification is an
investment bank’s nightmare and we can confidently expect significant investment
flows from the region if we provide the vehicles.
And if $4bn sounds like a lot of money, take a look at the future. Standard
and Poor’s have forecast that Islamic finance could grow to a value of $4
trillion. Why would we not want to attract capital flows of this size?
The chancellor has created the framework for London to emerge as the leader
in the global Islamic finance industry and his changes are likely to be
replicated in many other countries.
And, as a result, Islamic finance to move from being niche to the mainstream
as a viable and valid financing option for all.
Darshan Bijur is director of Islamic finance advisory at
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