DAR AL HARB - U.K.: SHARI'AH COMPLIANT BANKING IN THE U.K.

Banks ramp up their bid for the Islamic pound
For years, customers had to sacrifice their principles in order to borrow or invest. Now Muslim banking is going mainstream
By Esther Shaw

For most of us, opening a bank account or taking out a mortgage wouldn't mean breaking the law.

But for many Muslims in Britain, everyday personal finance is incompatible with religious teaching. Under sharia law, it is considered riba, or usury, to pay or receive interest for no work or effort. On top of this, Muslims are prohibited from investing in a range of activities and industries that conflict with Islamic law, such as gambling, pornography and the production of alcohol and pork. Many are forced to choose between acting against their conscience or opting out of mainstream UK banking altogether.

Over the past 18 months, however, the financial services industry has at last moved to offer a bigger choice of products tailored for Britain's growing Muslim population, allowing providers to tap into a lucrative market.

There are now more than 2,000 products available specially designed to comply with Islamic teaching on financial matters. Many more are in the pipeline.

In their attempts to attract more Muslim customers, banks have received help from both the Government and regulators. In this year's Budget, Gordon Brown simplified the rules governing Islamic bonds as part of his move to "make Britain the global centre for Islamic finance".

Then in April, regulations from the Financial Services Authority came into effect, giving the same protection to consumers taking out Islamic mortgages as to those taking out conventional home loans.

Findings from Lloyds TSB show huge demand for products among Muslims in the UK, with three-quarters of people interviewed wanting current accounts and mortgages to fit their faith.
Lloyds' own sharia-compliant current account offers no interest on balances in credit and no interest-free overdraft facility; those who go into the red are charged a flat fee.

When providing finance to a Muslim homebuyer, the bank actually buys the property on behalf of the customer, contributing up to 90 per cent of the purchase price, and leases this back to them. The customer pays the remainder of the purchase price upfront and then clears the outstanding debt - part rent, part capital repayment - in monthly fees over an agreed term.
Lloyds TSB says its product is based on the principle of ijara, or a lease agreement, with "diminishing mush-arakah". As the customer pays off more of the debt, they take greater ownership of the property.

Over at HSBC, Muslims can take out the bank's Amanah home finance and current account alongside a pension fund and buildings and contents insurance. HSBC's products also operate on the diminishing musharakah co-ownership model, while its pension fund tracks an index that includes the top 100 companies engaged in sharia-compliant activities.

Another recent arrival in this market is a stakeholder child trust fund, launched by The Children's Mutual in 2005. This is an actively managed global equity fund supervised by a board of Islamic scholars.

Bristol and West and West Bromwich building societies both offer home finance to Muslim customers through a tie-up with Alburaq, part of the Arab Banking Corporation (ABC).

"It is noticeable that the nature of our enquiries is changing and less explanation is now required about how these products work," says Keith Leach, head of Alburaq at ABC International Bank. "The focus is now more about how much they cost."

The Islamic Bank of Britain opened its first branch in 2004. It offers products including a current and savings account run on a principle of mudaraba, by which a profit-sharing agreement is struck between the bank and the customer. The money is invested in sharia-compliant financing and investments.

One of the big issues that remains, though, is cost: customers can expect to pay more to be sharia-compliant.

"The Amanah home finance rate depends on Libor [the rate at which banks lend to one another] plus a margin," explains Amjid Ali, head of Amanah at HSBC. "It is currently 6.41 per cent - but then you have to compare this with a standard variable rate."

He adds that, for banks, it is a "volumes game". "When volumes [of customers] increase, we can negotiate - but to build a business you have to be able to cover your costs in the first place."

For marketing purposes, HSBC's target profile is mainly professional people who are second-generation, practising Muslims. "Most customers accept there is a marginal cost for peace of mind and are prepared to pay for this," Mr Ali says.

As the market becomes more competitive, it is hoped rates will come down. But Mr Ali says there is still some way to go in convincing potential customers that the products meet the demands of their faith - an important factor in the growth of this sector.

"We are only scratching the surface," he says. "In the beginning, the general understanding of Islamic modes of finance was limited, and it was quite difficult to present the proposition as truly competitive."

At present, rival organisations are working together. "For the time being we are not there to undermine but to complement one another," says Mr Ali. "As none of us has a full suite of products, we will recommend other providers. This leads to customer trust."

'It's about taking the lesser evil'


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Pertinent Links:

1) Banks ramp up their bid for the Islamic pound