Islamic finance is a market worth over £ 1 trillion and UK banks are keen to break into this marketplace.
Sharia finance is derived from the religious text of the Koran. It follows three basic rules:
· Devout Muslims must not be involved with markets that are considered sinful, such as gambling, alcohol, tobacco, arms, cinema, pornography or anything to do with pig meat.
· They must avoid taking risks, such as investing in hedge funds and spread betting
· It bans the payment of interest. In other words you are not allowed to create money by money. This rule makes it hard to use Western banking products such as loans, mortgages and savings accounts.
Trading and investing for profit is permitted, but on the basis of partnership, in which the risk and profit are shared between two parties. This means that if you put money into accounts in Islamic banks you do not earn interest but you earn a profit share in the activities of the bank. If you want a loan to buy a car you are not given a loan, the bank buys the car for you at an agreed price.
Buying a house has often been a major problem so one way to achieve this is for the Bank to buy the property and lease it back over a 25 year period, without charging interest and then selling it at an agreed price to the occupier.
You would think that as Sharia banks could not invest in risky loans that they might have escaped the financial crisis, but you have to remember that they did invest, as described above, in property and so they were not immune, but due to their main geographical market areas they were much better off than Western banks.
Western banks are increasingly taking an interest in this market. Citigroup, HSBC, Lloyds, TSB, RBS, Barclays, Bank of Ireland, Standard Life and UBS are all now offering Sharia compliant products.
The Bank of London and the Middle East and the Islamic Bank of Britain offer some of the best rates of return available, but you do not earn interest. Instead they act as your ‘agent’ in making Sharia-compliant investments; they will monitor the deposit to ensure the agreed profit rate is met.
The Islamic Bank of Britain has had a significant impact on the UK and European financial industry. The Bank was authorised by the UK’s Financial Services Authority in 2004 and is the UK’s only wholly Shariah-compliant retail bank. The Bank has continued to maintain this position and still remains the only Islamic retail bank in the UK and Europe. It is considered a pioneer of retail Islamic banking and currently offers the largest range of Shariah-compliant retail financial products to the UK consumer.
The UK was the first member of the EU to authorise Islamic Banks, as a result, according to the CityUK Islamic Finance 2011 report, there are 22 banks in the UK offering Islamic finance products. This figure exceeds that of any other Western country. There were five Sukuk (Islamic bond) listings at the London Stock Exchange (LSE) in 2010 and one in early 2011. This brings the aggregate total at the LSE to 31 listings worth $19 billion. Islamic funds managed in the UK have combined assets of $300 million.
Islamic banking is now well established in the UK and is worth considering even if you are not a Muslim but are interested in a more ethical method of banking.