The past 20 years has seen a complete change in British culture and the UK is now viewed as a hub of cultural change and acceptance, combining many nations’ ideologies and ways of life.
Be it in food, business or religion, the UK is now one of the most diverse countries in the world. As a result, businesses in the UK have had to adapt to the changing needs of the nation and cater for cultural differences.
One such change has been the inception of Islamic finance, and the use of financial solutions which comply with the requirements of Sharia law.
According to the government’s 2001 census, England and Wales had a Muslim population of over one and a half million, accounting for 3 per cent of the total population.
Demographically in England, according to the study, 40 per cent of Muslims lived in London and it suggested that most of the Muslim population resided in urban areas, with less than 0.1 per cent living in rural areas.
Studies into the Muslim population have also predicted that this number is likely to grow over the next few years, to over two million, which will undoubtedly place greater emphasis and pressure on businesses and regulators to develop opportunities and solutions to cater for this growing, yet specialist financial market..
Sharia compliant solutions
Due to religious laws governing their faith, followers of Islam are unable to take out any loan that incurs interest – referred to as riba – and must abide by Islamic Sharia law, especially for property purchases.
Because riba is forbidden under Islamic law, much Islamic funding relies on Ijara and Murabaha lending, both of which are deemed Sharia-compliant.
Under Ijara, the borrower chooses a property and agrees a purchase price with the vendor. However, unlike traditional mortgage finance, under Ijara the property is then purchased by a vendor, with the property then sold on to the customer at the original price, with the payment spread over an agreed payment of time, thus negating the need for interest on the property.
As part of the agreement the customer also pays the financier rent for the use of the property, until the agreed period of time has elapsed – after which time full ownership of the property is transferred to the customer.
Murabaha finance solutions work in a similar way to Ijara, with the financier buying the property from the vendor. However, on the day of completion the property is immediately sold on to the customer, at a higher price.
Under certain schemes, a deposit is paid on the property – usually in the region of 20 per cent of the overall property price – with the remaining 80 per cent of the purchase price, including all associated costs, expenses and profit margin, repaid in equal monthly repayments.
Other Sharia-compliant funding solutions available in the UK market include Musharaka, which involves equity investment with regards to profit and loss sharing; Salam which promotes forward-financing; and Istisna, used for production and construction financing.
Improving awareness
Until recently, Murabaha incurred double Stamp Duty, as the property was viewed as being sold twice, which partly hindered the growth of the specialist sector, and in 2007 the Financial Services Authority (FSA) developed plans designed to improve knowledge and awareness of Sharia-compliant fiscal opportunities, and to limit consumer detriment.
As a result of the constantly growing and evolving Islamic market, the FSA recognised the need to develop new guidelines to match the needs of the sector, and in April 2007 launched regulation designed to give customers greater protection, while also abolishing the use of ‘double Stamp Duty’ on Sharia-funded property purchases.
Commenting on the regulatory changes, Sir Callum McCarthy, chairman at the FSA, admitted that the regulator would be looking closely at Islamic funding, but confirmed that there were no plans to formally regulate Sharia-based mortgage offers.
He explained: “Islamic finance is a fast-growing force in the world economy and the FSA’s open and principle-based approach to regulation offers the right environment for it to flourish in the UK.
“We believe in a ‘no obstacles, no special favours’ approach when authorising new financial institutions and welcome the development of this market as it provides certain UK consumers with financial products that are in line with their beliefs.”
He added his expectation that the Islamic finance market would expand considerably in the coming months and years, with this expansion driven by increasing demand.
“There is huge potential for an expansion of Islamic offerings in the UK’s financial markets, which will in turn boost London’s position as an international financial centre.”
Keith Leach, head of alburaq at ABC International Bank plc, welcomed the increased regulatory scope aimed at the market. He commented: “As a result of the legislation, Muslim home owners are now afforded the same regulatory protection as every other mortgage holder in the UK, giving them both peace of mind when taking out an Islamic mortgage and confidence that these products are here to stay. This is a highly positive new step and illustrates the growth of the Islamic mortgage market."
However, Datamonitor, in independent research on the Sharia market, admitted that any growth would be dependant on the impact of regulation and how it was spread across the sector.
The FSA, in its own move to boost the sector, set about authorising a wholly Islamic bank – the first European regulator to support such a move – and also confirmed that its objectives included promoting London’s role as a ‘hub’ for Islamic finance.
Recent market entrants
In August 2007 Lloyds TSB launched its ‘Islamic Student Account’. The account will not pay or charge interest, and any deposits held will be kept separately to other funds held by Lloyds TSB.
Announcing the scheme, Paul Sherrin, head of Islamic financial services, at Lloyds TSB, admitted that many firms would look at catering for the changing needs of the UK, with the Muslim population in need of financial solutions to align with their beliefs.
He said: “This student account is the first to have been designed with Muslims in mind. Britain’s two million strong Muslim community is as young as it is fast growing, with more than half under the age of 25.
“Until today, however, young Muslim students have had no choice but to go against their beliefs by opening traditional bank accounts. By providing a real alternative that meets their financial and religious needs, we’ve made it possible for them to enjoy campus life without compromising their faith.”
Since 2005, a number of banking institutions have entered into Sharia-complaint funding pilots and schemes, with Lloyds TSB and HSBC the most high-profile financial organisations.
However, despite Sherrin’s insistence that under 25-year-olds would benefit from Sharia-compliant offerings, a recent report into the Muslim population in the UK indicated that 59 per cent of Muslims would prefer to live under UK law.
This is compared to 28 per cent who indicated a desire to remain under Sharia law. A study into Sharia funding of property purchases against more traditional mortgages among the Muslim community also showed that 65 per cent had paid interest on a normal mortgage.
However, the BBC report, undertaken in January 2007 among 1,000 UK Muslims, revealed that those between the ages of 16 to 24 would prefer to remain under Sharia law, compared to 17 per cent of Muslims over the age of 55.
Adviser opportunities
Despite the well-documented growth of the Islamic finance sector, for many advisers it remains out of their scope.
Many advisers have refrained from entering into the niche market due to the inherent differences when compared to the mainstream market, as James Carter, adviser at Independent James, explains: “I really don’t think the Islamic mortgage market is going to see an influx of brokers in the near future.
"I have seen some large figures quoted on the size of the market but I think everyone can see that it’s a bit of a halfway house in terms of its compliance to Sharia law. It is a mortgage in every sense of the word when you look at the basic facts of money owed, money paid back, and home owned.
"I think it will be limited to Islamic brokers in any case as it is a sensitive area and one wrong word from a broker could see the end of the sale.”
However, in an ever-changing and growingly competitive market, those that offer an Islamic arm, or have knowledge of the sector can add another profitable string to their bow.
Datamonitor backs this, with the prediction that the sector could be worth £1.4 billion in 2009, growing by 47 per cent from the 2005 findings.
Highly specialist, training firms have made moves to help those keen to enter the market, and the launch of the Islamic Finance Qualification (IFQ) in 2006 coupled with CeMAP brief overview of the Islamic finance sector has done much to raise the profile of the market.
While Sharia funding and catering for the faith of Islam remains niche in the wider mortgage community it is clear that over the past three years a host of organisations, from the regulator to lenders and training schools have made moves to help improve knowledge and awareness of the solutions on offer.
With the BBC report indicating that 86 per cent of Muslims believe that religion is the most important thing in their lives, it is clear that there will be an even greater demand in the coming years. Indeed, as Darren Cook, head of mortgage research at Moneyfacts, comments: “With up to two million potential customers in the UK, more Sharia compliant finance is sure to follow.”
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