United Kingdom: a leader in Islamic finance

August 20, 2010

KARACHI: More than any other country, the United Kingdom has been by far the largest Shariah-compliant banking hub for Muslims. The United Kingdom Islamic banking division was larger than that of Pakistan, according to a report published a while back. It is the first Shariah-compliant retail banking division in the West which was authorised by the Financial Services Authority in 2004.

There are about 2.5 million Muslims constituting 3.3 per cent of the total population of UK. Approximately 50 per cent of those are currently living in London. Islamic financial products in the form of current accounts and mortgage are available to Muslims and non-Muslims living in the country.

London has become a major financial centre with big international financial institutions, particularly from Saudi Arabia and other Gulf states offering attractive Islamic products. London is considered by many institutions – Islamic and non-Islamic – as a world centre for Islamic finance, both on the retail and wholesale sides.

The Financial Services Authority functions under a single piece of legislation – the Financial Services and Market Act 2000 – that applies to all spheres of its operations. Deposits of customers are the main issue for the Authority. Under Islamic banking laws, the customer and the bank share the risk of any investment on agreed terms and equally divide the profits and losses between them. With a saving account, Islamic banks offer full repayment of the investment by informing the customer as to how much should be repayable to comply with the risk-sharing formula.

In the United Kingdom, 17 leading banks including Barclays, Royal Bank of Scotland and Lloyd Banking Group have set up special branches or subsidiary firms for Muslim customers. The 12 billion pounds in assets of UK are said to excel those of Muslim states such as Bangladesh and Egypt. There are 55 colleges and professional institutions offering education in Islamic Finance in UK, more than anywhere else in the world.

First Islamic bank of UK

The Islamic Bank of Britain is the first Shariah-compliant bank approved by the United Kingdom in 2004. The bank has set up six branches in London, Birmingham, Manchester and Leicester. This bank operates according to Islamic principles where both Muslims and non-Muslims are permissible to hold accounts. It currently offers a full range of retail and business banking services.

This bank has had a major impact on the Islamic financial market. In 2006, its customers totalled 20,814. This had increased by 120 per cent from the preceding year. According to recent figures, the bank had over 50,000 accounts and about 42,000 customers.

Recently, the Islamic Bank of Britain has raised 20 million British pounds. The net proceeds will be used to provide the bank with sufficient regulatory capital to manage and grow its business. Its shares are being placed with Qatar International Islamic Bank, an existing shareholder.

Seeing the great potential of Islamic banking in United Kingdom, many banks such as SAAB and HSBC have started offering Islamic banking services to their customers. The banks working under Islamic laws were not driven by the Muslim population in UK, but by the high net-worth Muslim investors from the Gulf Cooperation Council (GCC) countries, Malaysia, Brunei, Singapore, Indonesia, South Africa and Turkey.

Islamic home finance market

United Kingdom is the most developed Islamic mortgage market. The government has abolished double stamp duty for Islamic mortgage contracts. The Islamic home finance market is one of the largest components of the UK financial sector. In the retail sector, the Islamic mortgage market is now worth an estimated $2 billion per annum.

In the United Kingdom, Islamic mortgages have been structured under two different contracts. Murahaba is a form of credit that enables the customer to make purchases without taking interest on loan. In this context, the bank buys the goods for the customer and sells them to the customer on a deferred loan adding an agreed profit margin. The customer then pays the sale price for the goods in instalments, effectively obtaining credit without paying any interest.

The other is the Ijara which is a leasing agreement in which the bank buys and then leases an asset to its clients for a particular rental over a specified period of time. The bank may have the right to adjust the rental charge in accordance with the changes in the cost of finance.

At the Annual World Islamic Bank Conference 2009 in Bahrain, UK’s Islamic finance leaders shared their views on the future of Islamic finance at a dedicated UK roundtable discussion. The potential for growth of Islamic banking in both the retail and wholesale sectors is there. The professional and advisory services sector in UK is highly developed and can cater to global Islamic banking and finance centres and address the challenges of the future.

The research finding shows that there are ample opportunities for development and growth of Islamic financial system because the Muslim community is very eager to take financial products. The Financial Services Authority is willing to play its strategic part in supporting these developments within its regulatory powers.