UK: Islamic Finance In The UK: Recent Developments Building On Strong Foundations

The UK has sought to put itself at the forefront of Islamic finance and made a loud statement of intent in 2014 with the issuance of its GBP200 million (US$312.4 million) Sukuk – the first to be issued by a European government. While this was certainly a high point for Islamic finance in the UK, it actually represents the culmination of years of positive steps by successive British governments to promote Islamic finance in both the domestic retail markets and in international financial markets. BARRY COSGRAVE provides an overview of the state of Islamic finance in the UK.

The Finance Act 2003 changed the way the Stamp Duty (a tax on property sales in the UK) applied to Shariah compliant mortgages. Shariah compliant mortgages (which commonly use Ijarah or diminishing Musharakah structures) previously gave rise to a charge to stamp duty both on the purchase of a property at the initiation of the financing and at discharge of the financing upon repayment in full to the finance provider, owing to the fact that this involves an additional transfer of ownership. The introduction of specific legislation to do away with this double-charge opened up the domestic market for Islamic finance providers.

On the wholesale markets side, London has long been one of the main venues of choice for listing Sukuk (57 Sukuk have been listed on the London Stock Exchange) and the London Stock Exchange was quick to understand the nature of Sukuk, introducing a specific category for asset-based securities to avoid any overlap with conventional securitization structures.

Successive Finance Acts in 2005, 2007 and 2009 provided specific legislation relating to Islamic finance, and the Financial Services and Markets Act 2000 (Regulated Activities) (Amendment) Order 2010 introduced the concept of 'alternative finance investment bonds' in Article 77A to specifically cover Sukuk issues.

The UK reaffirmed its commitment to Islamic finance this year under the recently issued Emirates Sukuk. Emirates issued its US$917.03 million 2.475% Sukuk due 2025 on the 31st March 2015 with the benefit of a guarantee from UK Export Finance. This landmark Sukuk issuance was the first to be guaranteed by an export credit agency and is further evidence of the commitment of the UK to Islamic finance. The UK government's inaugural GBP200 million Sukuk in 2014 made good on the government's assertions over recent years of its willingness to promote London as an Islamic finance center to complement its status as one of the world's leading financial centers. The issue size of this Sukuk was, in the context of government securities, a small one but its importance in the promotion of the Islamic finance industry in the UK cannot be underestimated. The fact that this has been backed up by UK Export Finance shows that there is a real drive in the UK to promote and nurture Islamic finance.

The main driver for UK Export Finance's guarantee of the Emirates Sukuk was that the use of proceeds of the Sukuk was to be directed toward the payment for four A380-800 aircraft to be manufactured by Airbus. The wings for an A380 are manufactured in the UK at Broughton with Airbus also maintaining a support facility at Filton in connection with wings manufacture and associated research, systems and structures.

UK Export Finance's aim is to support exporters of UK manufactured goods and services through the provisions of guarantees and, as such, the Airbus A380 project is a natural fit. The pricing that was achieved on the Sukuk was clearly driven by the creditworthiness of the UK government combined with the growth to prominence of Emirates as the world's leading airline.

By issuing a sovereign Sukuk and now providing Sukuk guarantees, the UK has shown its commitment to Islamic finance which will no doubt lead to the growth in transactions of a similar nature to the Emirates Sukuk and the wider implications for Islamic finance in the UK are extremely positive.

The UK courts have also been at the forefront of disputes around Islamic finance instruments and English case law provides some of the most comprehensive (albeit still very limited) analysis of the treatment of contracts that are drafted so as to comply with Islamic principles.

In the Shamil Bank case (Shamil Bank of Bahrain v Beximco Pharmaceuticals and others [2004] EWCA Civ 19), the Court of Appeal held that English courts would look at contracts solely from the perspective of English law and would not have regard to the precepts of Islam in handing down a judgement: such matters were the exclusive preserve of Islamic courts and contracting parties are free to take their disputes before such courts should they wish.

The Blom Bank case (The Investment Dar Company v Blom Developments Bank [2009] EWHC 3545) raised some interesting alternative possibilities for the interpretation of Shariah compliant contracts. The Blom Bank case was one that was rejected for summary judgment but never went to full trial. However, the judge in that case did consider whether Shariah advisors could be called to provide evidence as expert witnesses. Unfortunately this was never fully explored.

Nevertheless, the willingness of the English courts to consider Islamic finance contracts and to examine their interpretation has been a factor for many parties in selecting English law as the most appropriate choice of law for international Islamic finance transactions.

Real momentum has been gathering over recent years putt ing London at the forefront of Islamic finance outside the traditional centers of Malaysia and the Middle East. This appears to be an astute move by the UK government as countries typically associated with Islamic finance move away from oil and petrochemicals-based economies and seek to diversify their international investments. Islamic markets remain short of the diversity of investment products that are available to conventional investors, a problem that London is ideally placed to help solve.

London's unparalleled expertise in the structuring, marketing and execution of complex structured finance transactions means that it is a natural fit to be at the forefront of developing the next phase of Islamic finance products.

Originally published in Islamic Finance News on August 5.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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