Big banks go cold on Islamic products
As Lloyds cancels its flagship Sharia mortgage, what happened to the big ambitions to woo the Muslim community?
Sunday 18 July 2010
Where did it all go wrong? It was supposed to be the new frontier for the giant high-street banks, attracting Britain's two-million-plus Muslims.
Many members of this prosperous minority had felt excluded from the British banking system and its zero-sum game of maximising profit and charging interest – a practice forbidden under Islamic law, or Sharia. As a result, charities have long estimated that the proportion of Muslims who were unbanked – who didn't have a standard current account – was higher than in the overall population.
Led by Lloyds and HSBC, from around 2002 onwards, UK banks started actively to court British Muslims, offering a range of products, from current accounts to mortgages, which complied with Sharia. HSBC even has its own Sharia-compliant wealth-management company.
"We have gone to great lengths to ensure that we could offer the Muslim community a range of products which were compliant with the beliefs of Sharia," says Emile Abu Shakra, Lloyds spokesman on Islamic products. "This involved adhering to Sharia principles of not charging interest, and keeping their accounts separate from the rest of our business, which is non-Sharia compliant. All of these have been done with the oversight of Muslim scholars."
Even the last government altered the tax system to enable Sharia-compliant mortgages to exist without the threat of having to pay double stamp duty. The idea was to reach out and take genuine account of a community's concerns, to build a new banking structure, and that then the customers would come – but it seems it hasn't quite worked out that way.
When quizzed, Lloyds admitted that it had recently ceased offering its flagship Sharia-compliant mortgage – which was launched with great fanfare in 2004. Mr Abu Shakra says that the decision had been taken due to market conditions and that the bank was "looking at options to meet its customer needs".
Lloyds won't disclose precisely how much new business has been gathered from its Sharia-compliant range of products, while HSBC has reportedly seen modest annual growth of 15 per cent in account openings; hardly the multi-billion-pound windfall predicted by analysts such as Deloitte at the start of the decade.
Now branch-based marketing of Islamic products has been cut, with Mr Abu Shakra admitting that the bank was looking to "word of mouth" primarily to push its range. But why have the mainstream banks so failed to tap the well of Muslim customers? And this despite constructing products which comply with Sharia and are, according to Darren Cook from price comparison service Moneyfacts: "Intrinsically no different to the products offered by banks which are wholly Islamic, such as the Islamic Bank of Britain."
The problem relates, as with much in the financial world, to the credit crunch. First, although the mainstream banks' Islamic products are separated from the rest of their business – and banks make a big play of this – they may have felt some of the fall-out from the damage to banks' reputations inflicted by the credit crunch.
"Islamic banking isn't just about ethics, it is a moral code about right or wrong," says Mohammad Qayyum, the director general of the UK-based Institute of Islamic Banking and Insurance. "The primary purpose of Sharia is that it helps improve fairness and equity in society. Understandably, for some in the Muslim community there is a sense of discomfort about the mainstream banks and the totality of their activities in the run up to the global recession."
Sub-prime lending to people who couldn't afford it, dodgy credit-default swaps and those massive bankers' bonuses are hardly in line with Mr Qayyum's idea that the Muslim community is looking to entrust their money to banks which improve fairness and equity in society. However, Mr Qayyum adds that it is only a minority of the community which would take such a negative attitude to the big high-street banks, and that the majority understand that the Sharia-compliant part of their business is separate from the now infamous "casino" banking operations.
Separately, though, the squeeze on banks' balance sheets also seems to be hitting their commitment to Islamic banking: "The cost of offering a mortgage that is Sharia-compliant is much higher than standard, and one suspects that with the bottom line now everything for the banks as they continue to bolster their balance sheets, this sort of expense is probably seen as a little bit of luxury," says Moneyfacts' Darren Cook.
But, long term, Mr Cook reckons Britain's big high-street banks could be missing a trick by going cool on Islamic banking.
"The intention wasn't to make money as such, but, when in recession, resources become finite and they have to deploy them elsewhere," he says. "This sort of retrenchment doesn't just apply to Islamic finance. However, it's still a massive untapped market base which is there for the taking."
What's more, Mr Qayyum reckons that the key points of Sharia can appeal to those outside the Muslim community: "The idea that banks should act by a moral code could be attractive to many in wider society – either Muslim, non-Muslim or those with no faith denomination," he says.
In response to the charge that Lloyds has gone cold on Islamic banking, Mr Abu-Shakra is adamant: "We are still attracting new business and our products from student accounts through to business accounts are available through every branch in the country. We are completely committed to meeting the needs of all customers from all communities," he says. However, the decision to stop offering an Islamic mortgage is no doubt damaging to Lloyds' once lofty ambitions.
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