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ISLAMIC FINANCE IN THE UK
Shari’a compliant housing finance from your high street bank & building society?
The global Islamic Finance market has grown to over US$200 billion. London is one of the main wholesale transacting centres outside the Middle East for this market. Yet, it is ironic that little by the way of Islamic financial products are available to the Muslims in the UK. This community of between 1.5 to 2.0 million Muslims, and some 350,000 households is a sizeable market and is unlikely to be ignored for long. Indeed, recent developments suggest that this lack of provision of Sha’ria compliant financial products for the resident UK Muslim community may be about to change dramatically.
Upto now two attempts have been made to tap the UK Muslim market for Islamic financial products and services. The early attempt by Dallah Al Barakah bank fell foul of the regulators when its offshore structure could not provide an unambiguous regulator of last resort. After several attempts at trying to find a mutually acceptable formula Sheikh Saleh Kamel of Al Barakah decided to wind down his operations in the UK.
Lately, the United Bank of Kuwait entered the fray with its Manzil housing finance product. The product has attracted a great amount of interest but take up has been low due to its structure and charges. Some of its shortcomings stem from the regulatory requirements in the UK. The UBK also does not have a wide presence in the high street and as a result is unable to effectively market the product to a large enough population.
A small Takaful operation looking after the insurance type needs of Muslims has also been in operation for some years. However, its reach in the community has been limited. On the other hand, the demand for pension and life insurance type products is growing in the increasingly affluent UK Muslim community.
A number of recent developments point to significant changes in the market place. Indications have emerged from the UK regulators that they do not any objections in principle to Sha’ria compliant financial products. As a result of these major high street players like HSBC and some building societies are seriously considering entering the market with an array of products. They have teamed up with Muslim institutions to try and address the regulatory issues which have so far discouraged the launch of Islamic housing finance and other products. A working party, comprising of practitioners and representatives of the Muslim Council of Britain (MCB) and Union of Muslim Organisations (UMO) has been formed with the blessing of the Governor of the Bank of England. This party has prepared a report on the issues of concern and has met several of the officials, regulators, departments and ministries to work out acceptable solutions.
The last meeting of representatives of the working party was with Ruth Kelly, MP, the Financial Secretary to the Treasury. In this meeting the issue of levying of stamp duty was discussed. The way Shari’a compliant housing finance product is structured would mean that stamp duty would be levied twice on a single property purchase. This additional levy would obviously make the product uncompetitive. The government is considering making changes to the stamp duty legislation to recognise this problem and facilitate the levying of a single charge on what in effect is a single purchase. In a similar way, many other issues have been taken up with different departments and officials to enable a like-for-like competitive product to be launched.The next meeting of the working party is scheduled to be with the Governor of the Bank of England in early December. Indications are that, if the some of the desired changes are incorporated in the 2003 Finance Bill, then one could see one or more of the high street financial institutions in the UK launching Sha’ria compliant products in the second half of 2003.
It is expected that the initial launch would be of a lease-based housing finance product. This would be followed by other more innovative housing finance products. These, in turn, would be closely followed by savings products eventually providing Muslims with an opportunity to save in a tax efficient Sha’ria compliant ISA (Individual Savings Account). Pensions and life Takaful (insurance-type) products could also follow. Indeed, as one or two major institutions who lead the launch of these products make headway and gain market share, other institutions would follow to protect their market. Thus, if successful, in a short space of time one may see a plethora of Sha’ria compliant financial products in UK high streets.
Many people have argued that Muslims have availed of existing products and are unlikely to abandon them for the new Sha’ria compliant products. However, anecdotal evidence suggests that many people would switch to Sha’ria compliant products if they are properly structured and competitively priced. Certainly, new buyers would seriously explore these facilities. As the range and scope of these products builds up, the whole saving and borrowing patterns of UK Muslims is likely to change. And as the volume of financing builds up the underlying ethical base of Islamic financial products would begin to make its mark on the market. At that point, many non-Muslims would also be attracted to these products. In time, these products may provide a valuable bridge between different communities and interest groups in the UK.