ISLAMIC FINANCE was a growing sector in the UK before the 2008 credit crunch shook the banking industry. Firms had begun to respond to client demand, recruiting experts in Sharia law and putting in place support networks. Now economies are clawing back, will the area become a focus for accountancy leaders, or does it remain a niche speciality?
The Big Four and top mid-tier firms all have experts ready and waiting to engage with clients on the topic, but it is not clear how much business this generates. People with an interest include those looking to invest in Islamic markets – property in Dubai was hugely popular before the crash – and those hoping to attract finance from cash-rich Sharia-observing countries
Islamic finance differs from Western finance mainly in that earning interest is illegal. To get around this, complex structures are put in place that allow lenders to profit from their capital, but this can mean the products fall foul of the UK tax regime.
Often, the return on an investment has to be transferred twice, potentially putting it in line for two transactional charges. The same is true for property, where the double transfer of assets can leave owners vulnerable to paying two sets of land tax.
For this reason, expertise can neither be guessed at nor faked. Fund structures are the most common Sharia product in the UK and Grant Thornton’s global head of property and construction, Clare Hartnell, said it is “incredibly important to understand the system”.
Need to understand aside, the degree to which the expertise is implemented may be more limited; while a number of clients have discussed the subject and want to have the option to act, it remains a niche area of activity for the mid-tier firm.
The top players all have fledgling departments, but with banks showing limited interest in the sector, there is little urgency to expand; the British Bankers’ Association has no team dedicated to Islamic finance, and the subject has only come up once in the last three years.
Irving Henry, BBA director of prudential capital and risk, said despite this, Sharia products remain important as they boost choice in the market. He pointed to HSBC’s Amanah division, an Islamic finance arm employing more than 300 professionals, describing it as “huge” and perfectly placed to attract investment from cash-rich countries.
Different speeds of post-crunch recovery could be the very thing to make firms focus on Islamic finance. With the UK and the West trailing far behind Eastern peers in post-recession economic growth, Islamic countries such as Malaysia and those in the Middle East offer a tempting pool of business to internationally focused firms.
Clients may be reluctant to invest in Islamic banks due to the low rate of returns they offer, but nonetheless seek a product – and an accountant – that understands and fits with their guiding principles. Under Sharia law, investments have to be approved by a scholar and risky transactions are strictly prohibited. For this reason, the products may be of interest to cautious investors burned by the financial crisis.
The most recent Budget made some small provision for Sharia finance products; informal consultation with industry representatives is planned, followed by the introduction of direct tax rules for variable loan arrangements and derivatives some time this year.
Ernst & Young recently revealed growth in the Islamic finance industry came under immense pressure in 2010. Previously expanding at a rate of 20% per year, customers are now bemoaning a lack of differentiation between the products on offer. Depressed property markets in the Middle East are also dampening clients’ interest in the topic, Hartnell revealed, but she remains confident the market will pick up.
An ICAEW spokesman said the institute may be turning its attention to the matter due to economic expansion in the Middle East. Members in the region do not always work with Islamic finance, as those engaged in free zones – where multinationals set up shop under Western reporting rules – primarily focus on international financial reporting. However, domestic-level accountants frequently follow Sharia regulations, meaning those active in the region are normally well versed in both.
Although the topic remains niche, forewarned is forearmed. Law firms too are beginning to gather specialists in the subject – Norton Rose is a notable example – indicating its significance crosses industries. With Islamic markets recovering well from the recession and interest in responsible investment high, firms could find clients’ thoughts are turning towards Sharia finance, and they expect their accountants to be ready.