The Islamic finance sector in the United Kingdom has seen enormous growth both domestically and internationally. London is one of the top five financial centers in the world for Islamic finance and is the premier center outside the Muslim world. What are the key factors that have lead to this success?

An essential ingredient is a regulatory framework that can accommodate Islamic finance principles and a regulator that is prepared to work with Islamic institutions to overcome technical hurdles. The Bank of England has had a close interest in the Islamic banking sector since the early 1990s. The Financial Services Authority, created in 1998, articulated the policy of “no obstacles, no special favors,” its approach being one of establishing a level playing field within the overall framework of its risk-based approach to regulation.

There must be a tax regime that enables Islamic financing structures and products to be treated in an equivalent manner to their conventional counterparts. The U.K. tax authorities’ aim has been to ensure that Shariah-compliant financial products are taxed in a way that is neither more nor less advantageous than equivalent banking products in the conventional sector. A package of measures has evolved and been introduced over a period of six years which, in broad terms, works by setting out particular fact patterns that describe generically equivalent Islamic financing structures and products, but without naming them, and applying specific tax treatment to putting them on a level playing field with the nearest equivalent conventional financing structure. The specific tax treatment is not restricted to Muslim customers or Shariah-compliant products. Indeed, the legislation is silent on this, as to avoid discrimination issues. (more…)