For generations Muslims wishing to purchase a property in the UK have had no choice but to comply with the conventional UK house buying system, borrowing a sum of money and then paying the amount back with interest, even though the concept of paying interest goes against their religious beliefs.
Recently, however, lenders have realised there is a potential market in offering Islamic mortgages, which allows Muslims a purchase method which complies with Shariah law.
Islamic mortgages work on the premise that the bank initially purchases the property, and the buyer then re-pays the bank, paying additional rent for living in the property until the money is paid back in full, after which ownership is transferred.
Due to a lack of providers, Islamic mortgages in the UK have been expensive, costing more than a conventional residential mortgage.
Obstacles faced by Islamic customers have included paying a deposit of at least 20 per cent; paying Stamp Duty twice – first when the bank purchases the property and second when the buyer ultimately takes ownership, an absence of financial regulation, and a lack of market competition.
Slowly though, the government has urged banks to work with Muslims and in 2003, double Stamp Duty on Islamic mortgages was abolished.
In addition, over the last five years more lenders have started to offer Islamic mortgages, including: United National Bank, HSBC’s Amanah Home Finance, the Islamic Bank of Britain, alburaq, Lloyds TSB and West Bromwich Building Society.
In tune with this shift, Ed Balls, Economic Secretary to the Treasury, said: “This is a fast growing market. We want centres such as Dubai and Bahrain to look to London as their first-choice financial partner for Islamic financial business.”
Overcoming change
Muslims make up 5 per cent of the UK population and it is predicted by Datamonitor that the Islamic mortgage market could be worth £4.4 billion within the next two years. As Balls explains in his speech, with such market potential, the government has a role in helping industry overcome barriers to Islamic finance in the UK.
Within the lending market we are already seeing this surface with the Financial Services Authority (FSA) introducing regulation for Islamic mortgages – also known as home purchase plans – in April this year.
After April, it will be illegal for a non-FSA authorised firm to carry out home reversion or Ijara home finance business. This will increase confidence in the products, which will not only benefit from the protection regulation offers but also from the addition of Key Facts Illustrations, which enable easier costs comparison.
David Hollingworth, head of communications at London and Country, commented: “The number of lenders offering Islamic mortgages has grown, signifying there is a niche market. However, a lot of Islamic mortgage products are currently sold through specific branches where there are a large proportion of Muslims in that area.
“That said, I do not see why these products should not be more widely available should a big enough demand exist. If big players like HSBC and Lloyds TSB are offering these products other lenders may follow suit, bringing competition which will make these products more competitive and possibly more popular.”
Catering to all needs
Another step forward is alburaq’s launch of an Islamic product for Muslim professionals that provides finance for up to 99 per cent of a property and adhere to Shariah Law.
alburaq has approved over £100 million worth of mortgage business and has already launched home and buy-to-let finance for the UK’s two million Muslims towards the end of 2004, offererring the Muslim community ability to own and invest in property.
Keith Leach, head of the alburaq at ABC International Bank plc, said: “It is noticeable that the nature of enquiries is changing and less explanation is now required about how the products work. The focus is now more on cost.
“At the moment the volume of Islamic mortgage business is only a small percentage of total mortgages in the UK, but based on current trends we are predicting significant growth over the next two years.”
A centre for Islamic finance
In his speech at the Islamic Finance summit, Balls announced changes to the Finance Bill 2007, which include the facilitation of the UK issuance of Islamic securitisation products known as Sukak; guidance on diminishing Musharka, repayment systems and Takaful, Islamic insurance.
In addition the government also welcomed a memorandum of understanding signed between the International Capital Markets Association and the International Islamic financial market to set standards for Islamic capital markets.
Ray Boulger, senior technical manager at John Charcol, commented: “With Islamic mortgages, there are still anomalies that need to be overcome, with the rent side of the product calculated by three months LIBOR, conflicting with Shariah Law. It seems to me that interest is being charged but is called rent to get round the issue. For Islamic mortgages to be done on genuine terms the rent should be calculated on the rent that property would attract, but this seems too difficult for banks to incorporate.”
Market diversity
Despite the obstacles, change is slowly occurring in finance industry where both economic and religious interests can be served. The UK is a multi-cultural nation, making it fitting that our financial services reflect this diversity and utilise its potential, whether a global or niche service to the Muslim community. Diversity, responsiveness and innovation create an advantage in all fields of life, so it is fitting that the government should aid it through legislation.
