Read what panellists from Hawksford, Collas Crill and Foot Anstey have to say about pertinent trends in Sharia compliant financial products.
Meet the panellists:
- Moira Ashby, Associate Director at Hawksford
- Nicholas Davies, Group Partner at Collas Crill, Jersey
- Imam Qazi, Partner at Foot Anstey
Islamic finance has certainly come to the fore in recent years. Where do the most promising growth opportunities lie for Islamic finance within the UK financial market?
We expect the global Islamic finance industry will continue to grow steadily over the next few years, and we will continue to maintain close working relationships with key banks, lawyers and clients who have an interest in Islamic finance. This ensures we keep our finger on the pulse and maintain a full understanding of what is happening in the market.
Whilst the UK Islamic mortgage market is relatively established with several key players, conveyancing in the UK using some forms of Sharia compliant financing takes longer, costs more and is subject to certain ambiguities from a tax perspective.
There continues to be a great opportunity in the UK and Channel Islands for banks, professional advisers and corporate service providers to continue to upskill employees and offer clients, whether Muslim or non-Muslim, access to Islamic products and services.
Within our industry we are seeing that many firms, from boutique companies to corporations, are now offering Islamic financing products, highlighting the vast growth that has occurred in this sector. On the banking side of our work, there is a great deal of activity coming through the London branches of Middle Eastern banks. I have noticed that there seems to be more competition in this area of the market as banks that traditionally did not offer this service, are now offering more products in this area.
Another key change I have noticed is that non-Middle Eastern banks, are also now offering some Islamic finance products, which shows that these products are becoming increasingly mainstream.
This increased popularity could be attributed to the increased robustness of Islamic financing products, which is the result of their nature: in order to be certified as Sharia compliant a product has to be kept separate from many asset classes, such as alcohol, meaning it is not exposed to the turmoil seen in many markets.
The legal and taxation landscape globally, and in particular in the UK, has developed around conventional financial transactions rather than the transactional structures of Islamic finance. It is therefore vital that the legal and tax framework can adapt to accommodate these differences. Specific standards have been developed by specialised standard-setting bodies, but regulatory and supervisory frameworks in many jurisdictions do not yet cater to the unique risks of the industry.
Since 2003, a series of finance acts by the UK government has removed tax barriers that made Islamic products less tax efficient than their conventional counterparts. The development of the reforms in the UK introduced change aimed at providing a level playing field for tax and regulations. Various governmental Islamic finance secretariats and bodies have also been established to promote the development of Islamic finance in the UK.
What are the major trends within the Islamic finance market and who are the main clients requiring this service?
It is largely our Middle Eastern clients that are requesting Sharia compliant financing and investment opportunities, and the majority of the Sharia compliant structures we see are in the real estate sector. For residential properties, the main focus for clients is ensuring their lending is appropriate under Islamic law. For commercial properties, there may be additional considerations to ensure an investment maintains its Sharia compliant objectives. For example, a warehouse may be partially used to store alcohol and profits arising from this activity would be considered haram.
We work primarily with onshore law firms, who in turn work with London banks or branches of Middle Eastern banks whose clients will vary greatly depending upon the types of products being explored and the deals being made. Typically we will see a Middle Eastern individual looking at private wealth solutions such as property or, more specifically to my area of activity, the corporate space where the client tends to have Middle Eastern or South East Asian companies and is looking to raise finance in a Sharia compliant manner.
Occasionally we receive enquiries from a non-Islamic client, company or individual searching for an Islamic structure, as they explore liquidity in the Middle East or South East Asia. Usually they work alongside investors who can only invest in an Islamic compliant capacity.
Sharia compliant investment in the UK property sector is an increasingly popular area within the private wealth sector. We have advised Islamic banks in the UK on various property financing transactions within the private wealth sector and foresee that this sector will continue to develop.
Sharia compliant investments have also been used to fund some of the capital's largest developments, including The Shard, the Olympic Village and Harrods. London's Battersea Power Station redevelopment project has secured a Sharia compliant syndicated loan of £467m, a step towards developing Britain as an Islamic finance centre.
What are the implications of this increased uptake of Islamic finance on the wider financial industry?
There is clearly a growing demand for Sharia compliant products and services. Many clients are seeking to expand their interests outside their home nations, so it is important that we are able to satisfy and assist with the demand.
As a result, businesses will have to structure themselves in response to evolving changes in the market and client requirements. It will become even more important for businesses to have an established presence in multiple jurisdictions with excellent reputations for robust regulatory frameworks. This is what will set advisory businesses apart from the competition.
The main issue to be taken into account as Islamic finance gains wider recognition is that new regulation is brought in to ensure that portfolios of Islamic products meet both the principles of Sharia and those of financial law. Our regulatory scheme needs to have sufficient transparency so that everyone involved in this industry understands them and feels able to abide by them.
Islamic finance works on the premise of partnership and equity rather than purely making profit. It has been suggested that equitable partnerships between Islamic financial institutions and their customers tend to be more resilient than conventional relationships.
There are, however, suggestions that Islamic financial institutions have overlooked the SME sector. A study showed that around 35% of SMEs in MENA are excluded from the formal banking sector because they seek Sharia compliant products that are not readily available in the market. Islamic banks need to build capacity and develop Sharia-compliant products to cater to this emerging sector.
Originally published in the February edition of Acquisition International 2016
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