azerbaijan: emerging market islamic banking and finance

NEWHORIZON Shawwal–Dhu Al Hijjah 1429
IIBI LECTURES
reducing balance basis, so the cost of the
machine can only be amortised over a
number of years.
With the Islamic transaction, the customer
claims capital allowances on a machine
costing £1100. As the capital allowances
are given over an extended period of time,
the customer’s tax relief with the Islamic
transaction would be deferred further into
the future than with a conventional
purchase where the finance cost of £100 is
deducted over the first two years. Overall,
the Islamic transaction would be treated less
favourably than the conventional
transaction.
Having illustrated the problem, Amin then
went on to explain how UK tax law has
been modified with the goal of equalising
the tax treatment. He explained that, strictly
speaking, the UK has no tax law for Islamic
finance. Instead, the legislation reveals a
fundamental principle that the same tax law
should apply to all citizens, regardless of
religion, and that the tax treatment of a
transaction cannot be allowed to depend on
whether or not it is Shari’ah-compliant.
Instead, UK law now defines certain types
of transactions, carefully using language
that is completely neutral regarding religion.
Amin illustrated this with the text of
Finance Act (FA) 2005 s.47, which defines a
transaction called ‘purchase and resale’ that
happens to correspond to murabaha. The
legislation then separates the mark-up in the
transaction (£100 in the example above)
and treats it in the same way as interest is
treated for tax purposes.
The table below sets out the UK tax law
concepts Amin covered, and the Islamic
transactions to which they correspond:
Tax law
Purchase and resale
Deposit
Profit share agency
Diminishing shared ownership
Alternative finance investment bond
After covering the tax rules in more detail,
especially those for alternative finance
investment bonds (sukuk), Amin addressed
some of the remaining problem areas. He
illustrated one problem with the Diagram 3
below:
Diagram 3 Islamic refinancing
In this example, a customer already owns a
property now worth £100, but which was
originally acquired, perhaps some years ago,
at a cost of £20. With conventional finance,
the customer could simply borrow money
secured on the property. However, if the
customer wants to raise finance in a Shari’ahcompliant
way using the property, he will
need to sell the property to the bank, rent it
back, and then eventually repurchase it.
The stamp duty land tax rules (SDLT) for
Islamic finance ensure that no SDLT arises
on such an Islamic refinancing, provided it
is carried out with a financial institution as
defined for tax law. However, there has been
no equivalent development of the capital
gains tax rules. Accordingly, the sale of the
property to the bank for any price above £20
will trigger a taxable capital gain, even
Islamic finance
Murabaha
Mudarabah
Wakala
Diminishing musharakah
Sukuk
though the customer will be committed to
repurchasing the property in due course.
‘A level playing field for Islamic and
conventional finance remains several years
away. However, the UK has made good
progress,’ concluded Amin.
October preview: Surviving the
credit crunch – Shari’ah-compliant
retail investment opportunities
The love affair with bricks and mortar has
been especially pronounced within the UK
Muslim community, who have historically
embraced property as a low-risk ‘Shari’ahcompliant’
alternative to conventional
investments. The credit crunch and resulting
property market price fall have dramatically
underlined the need for investors to hold a
diverse range of assets. Bashir Timol, director
of 1st Ethical, a UK-based independent
financial advisers firm, will analyse what
Shari’ah-compliant investments are currently
being developed by retail product providers in
light of current market conditions and assess
which existing conventional investments can
be adapted to meet Shari’ah requirements.
The lecture will take place on 16th October
at 6.30 pm at:
British Bankers’ Association
Pinners Hall 105–108 Old Broad Street
London EC2N 1EX
There is no charge to attend the lecture but
you must register. To register, please visit:
www.islamic-banking.com
www.newhorizon-islamicbanking.com IIBI 31