With media reports estimating the potential size of the Islamic banking and finance market at a thousand billion dollars, it is surprising that financial organisations have not been quicker to develop, market and sell products that meet its specific needs.
According to the National Census of 2001, the UK Islamic population represents 2.7 per cent of the country’s total, working out at about 1.6 million people. However many believe this is an underestimation and that the figure is closer to 2.5 million.
Clearly not all of these individuals will need mortgages, but a large proportion of them do and for lenders and brokers able to satisfy that demand in the early days, they will be well placed to garner large shares of what is a growing market.
Indeed lenders in this market believe the Muslim population will increase by around 6 per cent each year with around half currently under the age of 26. Datamonitor estimated the size of the UK Islamic mortgage market at £164 million last year and says it has grown at an annual rate of almost 70 per cent since 2000. This compares to a growth rate of just over 16 per cent for the mortgage market as a whole over the same period.
This is a young, vibrant and growing market with a demographic that should see the mortgage community falling over itself to serve its needs. The question therefore is why have lenders been slow on the uptake and what are they doing about it?
Compliance with Sharia law
The problem for lenders is that unlike standard mortgages, Islamic mortgages must be compliant with Sharia Law. Under Sharia Law, the payment of riba, or interest, is forbidden, which presents obvious complications. However these are certainly not insurmountable and the growing number of lenders coming into this market proves that there are effective ways to cope with the necessary stipulations.
Islamic Bank of Britain offers finance in this area and Bristol & West, through an association with Arab Banking Corporation, has created Alburaq Islamic Home Finance. West Bromwich Building Society is an introducer to Ahli United Bank, while HSBC has launched Amanah Home Finance. Lloyds TSB Islamic Financial Services has also been established.
Three kinds of non-standard mortgage products are currently available, all of which comply with Islamic (Sharia) law.
The first is Murabaha – where legal ownership of the property passes from the seller to the lender, who immediately transfers legal ownership to the buyer at a higher price. The buyer repays the higher price over the term of the loan.
The second is Ijara – where legal ownership of the property passes from the seller to the lender, who remains the legal owner of the property until the loan is repaid. While the loan is being repaid, the buyer also pays rent to the lender. Once the loan is fully paid, the lender transfers legal ownership to the buyer.
The third is a recent introduction, Diminishing Musharaka – involving joint ownership by the lender and buyer. With each payment by the latter, partial transfer of ownership takes place.
Understanding the market
The market is developing quickly and not only is the finance available for house purchase evolving, but other products in the insurance and savings market are also coming to the fore.
To enable practitioners seeking to move into this area to gain a better understanding of the issues, and also to help newcomers to the area, the ifs School of Finance will be holding a masterclass event on Islamic banking and finance on 29 November. This will enable attendees to identify those principles of Islam which are relevant to Islamic banking as well as describing the implications of Sharia law relevant to Islamic banking, and illustrating the challenges faced by Islamic banks.
The Financial Services Authority recently announced that Islamic mortgages would come under its regulatory remit next year. This will bring welcome protection to consumers, help encourage further lenders into the market and boost the profile of Sharia-compliant financial products.
Islamic mortgage finance has the potential to be one of the most exciting growth areas in the market. Now is the time to get involved if all concerned are to realise the benefits it can deliver.
In 2007 we will again consider the demand for education in this area. Having impartial education solutions that focus on Islamic finance would enable lenders and brokers to act with knowledge and confidence. An educational provision would also give consumers reassurance that those from whom they seek advice have attained a level of education comparable to other areas of the mortgage market.
Islamic mortgage finance has the potential to be one of the most exciting growth areas in the market. Now is the time to get involved if all concerned are to realise the benefits it can deliver.
Mark Roberts is head of faculty financial regulation and corporate and academic relationships at the ifs School of Finance
