There are around two million British Muslims which is three per cent of the UK total population. After Christians, they are the largest religious group. Based on figures in the UK Housing Review, 69 per cent of people in the UK are owner-occupiers and the figure is similar for the Pakistani and Bangladeshi communities, where most of them are Muslim. These points to the fact that most of the Muslims currently buy their homes through conventional mortgages as a necessary evil (www.telegraph.co.uk, 30 November 2002)
According to the Office for National Statistics the Muslim population of the UK is 1.91 millions in the year 2001. Most of the Muslims are from Pakistan, Bangladesh and Middle-East Arab ethnic origin. Due to the Islamic faith and for the ethical reason people tend to divert to Islamic finance. To buy a home and for commercial properties some banks are lending money through Islamic Mortgage.
Islamic Banks In The UK
There are five fully Sharia compliant banks have been established in the UK in the last few years and around 17 conventional banks have been set up windows to provide Islamic financial services in the UK. The Islamic Bank of Britain (IBB) is the first established in the year 2004 to operate retail Islamic banking in the region. Although it has struggled in the current financial environment like many conventional banks, since the start of 2008 it has increased its number of accounts by 9 per cent to 74,000 (Oakley, 2009). Since 2008 Islamic Bank of Britain were providing the commercial mortgage only and from 2008 they started to finance the Mortgage with the name Home Purchase Plan to the Muslim and non-Muslim customers (www.islamic-bank.com). European Islamic Investment Bank (EIIB) listed in the year 2006 and offering Sharia'a compliant investment banking activities like Islamic Treasury and Capital Markets, Structured Trade Finance, Private Equityand Corporate Advisory, Sharia'a Advisory and Asset Management (www.eiib.co.uk). In the year 2007 The Bank of London and The Middle East (BLME) received FSA authorisation and provided innovative Sharia'a compliant funding to diverse client based in the UK, US and Europe. BLME is one of the best capitalised Islamic Bank in the UK, maintains a high level of liquidity that allows the bank to offer flexible and competitive finance solutions in what in recent times has become a less liquid market (www.blme.com). European Finance House, a unit of Qatar Islamic Bank received banking license in 2008 and offers the customers different types of Islamic financial products for Asset Management, Corporate & Institutional Finance and Real Estate. For Corporate & Institutional Finance EFH is offering wide range of services like Shari'a compliant debt financing, Capital Markets, including Sukuk issuance, Treasury, International Trade Finance, Private Equity and Mergers and Acquisitions. Similarly for Real Estate EFH is also offering Real Estate investment and development advisory services, including site identification, investment analysis, acquisition, due diligence, structuring and execution; Real Estate investment and development project monitoring and general real estate asset management; Musharaka-based Real Estate financing and Development and marketing of real estate funds (www.europeanfh.com).
In same year 2008 Gatehouse Bank started wholesale investment banking in the city of London. This bank is providing services in the areas of Capital Markets and Syndicated Financing, Institutional Wealth Management,Real Estate, Placement, Shariah Advisory Services and Treasury Products (www.gatehousebank.com)
Assets Of Islamic Banks In The UK
Source: The Banker, IFSL
With these five Sharia complaint banks (as stated in the table 4.2) there are around 17 conventional banks in the UK offering Islamic financial services by setting up windows. These include HSBC Amanah, UBS, Alburaq (ABC International Bank), Lloyds Banking Group, Royal Bank of Scotland, United National Bank and Barclays Bank. HSBC Amanah is the first and only conventional bank with the Islamic window Amanah reported in the Banker's survey as its assets of $16.53 bn that is 85% of the UK's identified assets, rose up more than a half from the previous year. Other banks BLME, EIIB and IBB are also growing substantially with comparison with their previous year's performance (www.ifsl.org.uk).
Global Assets Of Islamic Finance
The Global market for Islamic finance is estimated to have reached $951bn at the end of the year 2008 that is 25% up from $758bn in the year 2007. The total of Islamic commercial banks is ranking on the top for 74% of the total Islamic assets, Investment banks are 11% and Islamic Sukuk issues are 11% of the global Islamic assets. The total growth continues as some new companies started their business in the year (www.ifsl.org.uk).
Islamic Finance By Country
Source: The Banker, IFSL
The leading countries in the world for Islamic Sharia complaint are Iran $293bn for the year 2008, Saudi Arabia $127bn in the second position and Malaysia is $86bn from The Banker's survey of 500 organisation worldwide. The next few countries are also from the gulf including Kuwait, U.A.E, Bahrain and Qatar. Surprisingly the UK is ranked in 8th position with only $19bn assets, most of the assets based on HSBC Amanah (www.ifsl.org.uk).
Islamic Banks In The Western Countries & Offshore Centres
Source: The Banker, IFSL estimate for UK
UK Islamic banks exceed any other Islamic banks in the western countries and the offshore centres. It is significant that the UK is the only country in the European
Union to have Islamic banks where there are five in total, in spite of the UK's 2m Muslim population being much smaller than France's 7m and Germany's 4m (Oakley, 2009).The Islamic mortgage market has grown around £500m, which is 0.3% of the total mortgage market in the UK (www.ifsl.org.uk).
Islamic Funds Worldwide
Source: Ernst & Young Islamic Funds & Investments Report 2009
The market for Islamic funds has been expanding steadily. According to estimation of Eurekahedge the total number of sharia compliant funds reached 680 funds by the end of the year 2008 having risen more than threetimes from around 200 in 2003. Ernst & Young estimates that the total value of these funds has grown from $20bn in 2003 to $44bn in 2008 (www.ifsl.org.uk).
Rate Of Return On Assets
According to the estimation of Eurekahedge, returns on Islamic funds were down around 28% in the year 2008 where overall Islamic funds have returned an average of 0.1% a year since 2000 (www.ifsl.org.uk).
Islamic Financial Education Providers In UK
The lack of human capital in the sector affects all regions, including promising markets such as the U.K. Training of Islamic bankers has not kept pace with the rapid growth of the sector and, as a result, there are shortages throughout the industry (KMPG). According to Research Intelligence Unit, UK is the largest Islamic financial education provider with only 55 Institute in the World leaving behind Malaysia with 24 providers, U.A.E with 18 and Saudi Arabia with 17 Islamic financial education providers (www.ifsl.org.uk).
Providers Of Islamic Financial Education
Number of institutions by country providing Islamic financial education
Source: Research Intelligenc Unit
Chartered Institute of Management Accountants (CIMA) is offering the CIMA Certificate in Islamic Finance (Cert IF), which is the first global qualification to be awarded by a proffesional chartered accountancy body on Islamic finance. Securities and Investment \institute is awarding The Islamic Finance Qualification (IFQ) jointly with Ecole Superieure des Affaires (ESA), which is a leading leading business school in the Middle East. Another several institutes are also providing Islamic financial education like Cass Business School, Association of International Acoountants (AIA). Institute of Islamic Banking and Insurance (IIBI) is the only specialist professional organisation that provides education, publications and training in Islamic finance (IFSL).
Islamic Mortgage Through An Islamic Bank
Islamic mortgage is provided in the UK in different banks both conventional and Islamic. Islamic Bank of Britain is the first Islamic bank in the UK established in 2004 and stated to lend Commercial mortgage with the name Commercial Property Finance on base of Islamic Sharia compliant concept, Diminishing Musharaka with Ijara in the year 2006. The chart 4.10 shows IBB net investment in commercial property finance.
Source: Islamic Bank of Britain Annual Report and Financial Statements2008 and 2007
After three years of lending commercial property finance. In the first year Islamic Bank of Britain lended £2.3m only for commercial property finance in 2006, but within three years it increased 267% to £8.6m. In the year 2008 Islamic Bank of Britain first introduced Home Purchase Plans which is alternative of conventional mortgage, also based on Sharia complaint. In the first year the bank invested £7m only. In the year 2008 IBB had a loss of £5.9m less than previous year £6.9m (www.islamic-bank.com)
In the 2009 Islamic Bank of Britain fixed rate Home Purchse Plan (alternative of conventional mortgage). The product was offering a low rental rate of 3.99% and with an administration fee of only £299. This was to competite with the other conventional banks of UK to provide fixed rate mortgage and to attract more new and exisyting customers (www.propertyarticles.com, 01 April 2009)
UK Government Policy
“The Government's policy objectives for Islamic finance are clear. First, to establish and maintain London as Europe's gateway to international Islamic finance. Second, to ensure that nobody in the UK is denied access to competitively priced financial products on account of their faith. The Government's approach to achieving these objectives is characterised by the principles of fairness, collaboration and commitment.Significant progress towards meeting these objectives has been made. The UK is now the leading centre for Islamic finance outside of the Gulf Cooperative Council and Malaysia. London and Birmingham now host the only standalone Islamic financial institutions in the EU. UK consumers can now access a wide range of Shariah compliant retail financial products and services, which are regulated to the same standard as conventional financial products, conferring the same degree of consumer protection”( Source: HM Treasury ‘The development of Islamicfinance in the UK: the Government's perspective', December 2008)
More over in 2003 the Government of UK removed double tax on Islamic mortgages and extended tax relief on Islamic mortgage on Islamic mortgage both for the companies and the individuals.
“The Finance Act of 2003 which brought a very notable change in British legal/finance legislation. The importance of this Act lies in the relief which has been introduced to abolish the duple fees of Stamp Duty Land Tax connected to Islamic mortgages arrangements (Paracha 2003, p 12) because, previously stamp duty would have been charged on the purchase of the property by the bank and then again on the purchase by the customer‟ (FBD 2006, p 9).” (http://webjcli.ncl.ac.uk/2009/issue5/pdf/khanfar5.pdf#10)
“The Islamic mortgage has been fortunate in getting legal obstacles removed so that they are applicable under English law. This has been intended to facilitate the needs of Muslim consumers so that they can have an Islamic mortgage with equal safeguards to those available under existing FSA mortgage regulation (Memorandum 2006, p 3). The British government confirmed its positive standpoint by releasing the necessary regulations which allowed the Islamic mortgagees to be treated in the same way as the mortgagees of conventional mortgage modes (Solé 2007, p 17). Based on that, the Islamic mode of mortgage has become more available and more widely accessible (Russell 2004, p 13).” (http://webjcli.ncl.ac.uk/2009/issue5/pdf/khanfar5.pdf#10)
Regulation And Legal Frameworks
Professor Rifaat Abdel Karim, secretary general of the IFSB, also agrees that systemic weaknesses present a big risk. "Muslim member countries need to beef up their financial systems," he explains. "If you are going to have Islamic banks operating in your system, one of the most important issues is to have a high quality regulatory framework and good supervisory standards. That is the safety net. It is good for market players to know what is required from them. There is still a lot to be done given the growth and developments that are taking place in the global Islamic finance industry."(http://www.forumfrancais-financeislamique.com/data/document/elements-communiques-par-kpmg.pdf) In fact, the U.K. has to date introduced more enabling legislation to facilitate access for U.K. Muslims and others interested in Islamic ethical finance to products consistent with Islamic principles than most of the Islamic Development Bank (IDB) member countries.rising demand for Islamic finance has led to handsome returns for key players changing the law or introducing enabling legislation takes a lot of persuasion and time, says one Islamic banker( http://www.forumfrancais-financeislamique.com/data/document/elements-communiques-par-kpmg.pdf)
The quality and transparency of financial reporting and disclosure in the Islamic finance industry differs significantly from one regulatory jurisdiction to another. There is a general concern in the market and among those interviewed that IFIs, with the notable exceptions of those operating in the U.K., Malaysia, Bahrain and perhaps Turkey, should have more rigor in their disclosure and financial reporting, especially to the general market.
The international rating agency Standard & Poor's, in a report last year entitled â€˜Enhancing Financial Reporting and Transparency: Keys to the Future of Islamic Finance', warned that financial disclosure practices among IFIs fall well short of international best practice. "Standardisation of financial reporting is a key challenge for the rapidly growing Islamic finance industry," said the report, "in order to avoid fragmentation and ultimate ghettoisation at a time when ShariahÂ compliant investment vehicles as an asset class are coming of age."
The International Financial Reporting Standards (IFRS) constitute the main reporting framework for IFIs, but domestic regulation has also encouraged heterogeneity over uniformity. Frameworks in place in the leading IFI countries include IFRS, AAOIFI (Accounting and Auditing Organisation for Islamic Financial Institutions); Malaysian Accounting Standards; and some local GAAPs which are influenced by a combination of IFRS, AAOIFI and local central bank reporting guidelines.””””””””””””””””( http://www.forumfrancais-financeislamique.com/data/document/elements-communiques-par-kpmg.pdf)
Given all these complexities, the process of measuring the performance of Islamic financial products can be tough. However, the major western rating agencies, such as Standard & Poor's, Moody's and Fitch, have been slow to adapt their processes and frameworks relative to the rapid rise of the Islamic finance world.
"[The Islamic finance sector needs] a tailor-made rating agency to rate the performance of IFIs using a methodology and nomenclature that is consistent with the specificities of Islamic finance," says Mr. Al-Ghannam of KFH. "The measurement of performance differs even though the start and end result of Islamic finance is the same as conventional financing. However, in the middle, there is a huge difference." It remains to be seen whether the nascent International Islamic Rating Agency (IIRA), set up inter alia by the Islamic Development Bank, can assume this role.
The Western rating agencies have so far declined to develop a specific rating methodology and criteria for IFIs and instruments based on their unique Shariah-compliant structures, arguing that their current methodology and criteria for rating conventional institutions and instruments suffice.
To fill this gap, in Malaysia both the Rating Agency of Malaysia (RAM) and the Malaysian Rating Corporation (MARC) have pioneered new methodologies and criteria specifically for rating IFIs and instruments such as securities.
Nevertheless, institutions such as KFH are prepared to give the Western rating agencies the benefit of the doubt, stressing that performance measurement is a two-way education process, and that the Western agencies "are learning just as much from us". (http://www.forumfrancais-financeislamique.com/data/document/elements-communiques-par-kpmg.pdf)
Experts Opinion Regarding Islamic Mortgage
“Encouragement and enthusiasm for Islamic financial products can be seen in the speech by Sir Howard Davies, when he was Chairman of the FSA (Financial Services Authority). During a conference on Islamic Banking and Finance in Bahrain in September 2003 Sir Howard Davies said: “there is no objection in principle to the idea of an Islamic bank in the UK, provided Islamic banks met the FSA‟s regulatory requirements, the UK had a clear economic interest in trying to ensure that the conditions for a flourishing Islamic market are in place in London good for Muslim consumers, good for innovation and diversity in our markets and good for London as an international financial centre(Ainley et al 2007, p 9)”. (http://webjcli.ncl.ac.uk/2009/issue5/pdf/khanfar5.pdf#10)
Source: Islamic Bank of Britain Home Purchase Plan Leaflet
“The crucial point of difference between the Islamic and the conventional English mortgage contract is prohibition of Riba (interest), which is not acceptable in Islamic contracts, including mortgage, under any circumstances.”( http://webjcli.ncl.ac.uk/2009/issue5/pdf/khanfar5.pdf#10)
“One of the notable differences between the English conventional mortgage contract and the Islamic mortgage contract is that the client under the Islamic mortgage contract can repay the entire sum to the bank at any time before the end of the agreed period without any penalty. This is not allowed under the conventional mortgage.” (http://webjcli.ncl.ac.uk/2009/issue5/pdf/khanfar5.pdf#10)
Comparision of the Islamic mortgage with the conventional mortgage in the UK
In this report the two mortgage providers mortgage rates, monthly repayments and other factors were analysed based on the data available on 27 January 2010 in order to get a comparision between Islamic mortgage and conventional mortgage. Here Islamic Bank of Britain Home Sharia'a Approved Home Purchase Plan and NatWest Mortgages for first time buyers were presented:
The Islamic Bank of Britain has recently reviewed its product offering and will for the time being offer the following product to UK based customers.
§ Product Code: S01108 Standard product
§ Margin 4.25% + Base rate. Current rental rate: 4.75%
§ £299 admin fee
§ Up to 60% finance (minimum deposit required is 40%)
§ Min finance: £70,000
§ Min property value: £117200
§ Ceiling: Margin + 2%
(Source: Personal query through online)
The following is for NatWest mortgage quated from Money Super Market:
- Variable Mortgage
- First Time Buyer
- Borrowing £90,000
- Term of 25 years
- Property value £150,000
- Initial monthly repayment £464.26
- Located in England
First product is Islamic from Islamic Bank of Britain and second one is conventional from NatWest Bank Plc. For both the product the house price is £150,000, minimum deposit at the time lending is 40% of the total house price i.e. £60,000, admin fee is £299 and length of the contract is 25 years. These all data are similer, but whenever any customer go to lend money to purchase a house they will compare the APR where for Islamic Bank of Britain that is different and the term is used as Current rental rate which is depending on Margin 4.25% + Base rate. As the base rate of the Bank of England is 0.50%, so the Current rental rate is 4.75% and the initial payment is £513.11. When the base rate will go higher it is assumed that the rate may go higher. In that case the cost will increase. With the lowest base rate in the history of the UK home finance from Islamic Bank of Britain shows comparitively higher than one of the conventional mortgage provider.
Different Opinion About Islamic Mortgage
“It is true that Muslim mortgage products are priced higher than conventional mortgage products with customers expected to find a higher deposit. Due the nature of the transaction, institutions have added cost implications and certain there is an element that early innovators do see money to be made. However, as more lenders come onto the market, we will see a rapid cost reduction and more competitive products being made available”( http://www.islamicmortgages.co.uk/index.php?id=231)
“In most circumstances, the comparison between the price of an Islamic financial product and a conventional (that is, non-Islamic) product is known as "benchmarking". It is important to understand that the process of benchmarking, involves referring to a product that might use an interest rate (such as LIBOR plus a further profit margin) when determining the level of Rent charged, is not the same as charging interest under a loan. Shariah Scholars have permitted Islamic finance providers to refer to an interest rate benchmark for determining Rent provided that the benchmark is well known to everyone so that no dispute over the amount of Rent can arise in the future. If the characteristics of Ijara are present (e.g. the Bank owns the property and leases it to the customer) it does not matter that the Rent is calculated in this way” (http://www.islamicmortgages.co.uk/index.php?id=231)
Controvercy Regarding Islamic Mortgage
Some of the Muslims confused to go for an Islamic mortgage because they doubts “ If An "Islamic" Mortgage Costs Too Much, Can I Take A Conventional Mortgage?” They think that the Murabaha and Ijara Shariah-compliant alternatives for conventional mortgages and these house-financing schemes are nothing but interest-based transactions in disguise and blamed so called Islamic mortgages are nothing but conventional mortgages under a new name and a new banner. Here one of the experts Muhammad ibn Adam al-Kawthari from Darul Iftaa, Leicester, UK's opinion are quouted where he commented “using Musharaka/Shirka as a mode of financing can be difficult in the current economic setup. The whole economic setup needs to be changed in order for financing to be based on Musharaka. It would be very difficult for a private financial institution to introduce Musharaka as a mode of financing, unless it has the support of the state bank. Thus, due to the fact that there are practical difficulties in implementing Musharaka as a mode of financing in the current economic climate, contemporary scholars have permitted the use of Murabaha (sale on deferred payment basis) and Ijara (leasing) as modes of financing.” He emphasised “it should always be remembered that, originally, Murabaha and Ijara are not ideal modes of financing in Shariah. They are merely devices to escape from being involved in interest, and not ideal instruments to carryout the real economic objectives of Islam. Hence, they should only be used due to need and as a transitory step taken towards the Islamisation of the whole economy”. Moreover he explained “the objective and purpose of Shariah will not be achieved in using Murabaha or Ijara as house-financing schemes. The real alternative is partnership (musharaka), which is a basis for equal distribution of wealth in the society. However, these schemes are not interest-based, hence lawful.” With the above explaination he added “it would be wrong to think that it is permitted to purchase a property with a conventional mortgage by committing a lesser harm. The simple reason is that there is no clash here of two harms in order for one to take the lesser of the two. Rather, one has a choice between an unlawful interest-based conventional mortgage and a lawful Islamic alternative, even though it may not be the ideal alternative. Indeed, one will have to pay more in a Murabaha or Ijara agreement, but that does not make the transaction unlawful or invalid, for the ruling of Shariah is not based on the legal wisdom as explained earlier. If one is unable to purchase a property through a Murabaha or Ijara agreement, then one will have no choice but to seek an interest-free loan from family and friends.” At last he concluded “purchasing a house or property with a conventional mortgage will remain unlawful. It was not permitted by the scholars even before the various alternative schemes came into existence, neither do they permit it after their emergence.” (http://qa.sunnipath.com/issue_view.asp?HD=1&ID=4720&CATE=47)