[the Guardian] Islamic banking holds mainstream appeal Islamic financial products are few and far between in the UK, but their ethical credentials mean that they may be attractive to a wide spectrum of consumers, says Mark Tran
Monday May 27, 2002 About three million Muslims live in Britain, but so far they have had little opportunity to adopt banking practices which accord with Islamic tenets. Only the United Bank of Kuwait - which maintains only one branch in the UK - offers Islamic banking products; odd, as Britain prides itself on offering innovative financial products. It's a relatively recent phenomenon, but Islamic banking is now an established facet of the financial landscape. Islamic banks emerged in the mid-1970s in Saudi Arabia and the United Arab Emirates. Since then, Islamic financial institutions have spread to a large number of Muslim countries, including Kuwait, Bahrain, Qatar, Turkey, Pakistan and Indonesia. These institutions have taken the form of commercial banks, investment banks, investment and finance companies and insurance companies. In all, Islamic financial institutions manage about $200bn (£137bn), with the sector growing approximately 15% a year. At its core, Islamic banking prohibits the charging of interest, although some scholars in the US dispute this. Islam bars Muslims from taking or giving interest, known as riba, regardless of the purpose for which such loans are made and regardless of the rates at which interest is charged. In addition, Islam bans investments in alcohol, pork, gambling and pornography. Most Muslims would also object to investments in the financial service sector, as banks and insurers make their money from charging interest. Hence, Islamic equity funds have tended to gravitate towards telecommunications and technology sectors, which was fine until the technology bubble burst two years ago. As a result, Islamic equity funds have shrunk to $3.3bn this year from $5.5bn in early 2000, according to Failaka International, a research group based in the US. Despite the ban on interest, most Muslims in Britain have taken conventional interest-based mortgages. The total number of Muslim households as estimated by the Muslim Council of Britain is around 500,000. Of that number, about 40,000 families seek financing for home purchases each year; however, a large number of Muslims apparently still shun conventional mortgages because they do not conform to Islamic principles. "There is pent-up demand," said Iqbal Khan, chief executive office of Amanah Finance, HSBC's Islamic banking arm, based in Dubai. "We have regularly received enquiries regarding the availability of Islamic finance products, in particular Islam-compatible finance to purchase both residential and commercial properties. The needs of these Muslims need to be served immediately." But Amanah Finance and the other banks interested in tapping Britain's Islamic market face a number of regulatory issues that have to be settled before offering Islamic financial products such as home loans, current accounts, insurance and pensions in Britain. Mortgages are one of the products most in demand but, under Islamic rules, the bank cannot charge interest for a loan to buy a house. Instead the homebuyer borrows nothing, but pays a rent instead, only some of which will go straight to the bank. In effect, the customer signs a lease with the bank. But under current regulations on lease agreements, the product has to be 100% risk weighted. In other words, Amanah Finance says, it has to set aside the full amount of the property to cover the full value of the house in case the buyer cannot afford to pay the rent, whereas a conventional mortgage has a risk weighting of only 50%. Another impediment for Islamic banks is the prospect of double stamp duty. The first would arise when ownership is transferred from the seller to the bank at the start of the lease. The second would occur at the end of the lease when ownership is transferred from the bank to they buyer. For an Islamic mortgage to be viable for a bank, the bank needs to be exempted from the second set of stamp duty. Finally, unlike a conventional mortgage, the proposed product would require two sets of solicitors - one for the beginning and one for the end of the lease - thereby making the product more expensive. So Islamic institutions would also want an exemption from a second set of solicitors. Discussions have been taking place with the Bank of England and the financial services authority (FSA) on these issues and Mr Khan is confident that they will be resolved in time so that Amanah Finance can begin offering Islamic financial products this later this year. That is not inconceivable as the regulatory authorities have already approved Islamic mortgages in the US. Mr Khan believes that Islamic finance potentially has appeal for the mainstream as well as Muslim consumers because of its ethical basis. "Islam teaches us that money should be channelled toward the 'real' economy, the production of real goods and services and not the 'financial' economy such as hedge funds and derivatives," he argues. "It keeps us in touch with the real economy and away from speculation."
