Islamic finance makes a move into the mainstream
Sharia-compliant financial products are starting to develop a universal appeal, says Kate Hughes
Saturday 26 July 2008
There has been a substantial Muslim community in the UK for at least 300 years, so UK financial companies may have been a little slow to cater for their monetary needs. But mainstream financial groups are quickly waking up to the fact that there are some 2 million Muslims in the UK whose financial needs must be met, as well as many more non-Muslims who agree with the ethics promoted by Islamic law, or sharia.
Sharia governs, among other things, a Muslim's economic and social life, dictating how believers should conduct themselves. It forbids certain activities and transactions: those involving alcohol and pork-related products, but also armaments, gambling, pornography and other activities deemed socially detrimental.
Crucially, Islam places no intrinsic value on money, so earning or paying interest (riba) is prohibited – ruling out the majority of traditional mortgages, investments, savings and insurance products. So financial providers have had to do some creative thinking. The result, however, has been the launch of a wealth of new interesting and innovative products - some of which are now starting to capture the attention of non-muslims as well.
Buying a home under sharia usually involves one of two types of Home Purchase Plan. Under an ijara or lease option, the bank buys the property and the client pays rent to the bank. At the end of the term, the bank hands the ownership of the property over to the client. Alternatively, a murabha or partnership approach means the bank buys the property with the client who then makes regular payments to gradually assume ownership. In both cases, the bank simply adds its costs to the price of the property which the client pays back as part of the whole.
Both options could prove interesting propositions in an uncertain economic climate, regardless of your religious inclination, says Peter McGahan of the independent financial adviser Worldwide Financial Planning. "These approaches could mean that a home owner may not have to worry about the uncertainty of interest rates. You know exactly how much you will need to regularly budget and how much your property will cost you in the end." But, he adds, there are potential pitfalls. "Bear in mind that, particularly with murabha, you are paying a higher price for a property in a falling market. You are increasing your risk of negative equity, and this could mean you will be unable to move again in the short term." Sharia-compliant mortgages are available from a number of providers, including Lloyds TSB (www.lloydstsb.com) HSBC (www.hsbcamanah.co.uk) and the Islamic Bank of Britain (www.islamic-bank.com).
Current accounts & savings
An Islamic current account will give you the same benefits as a standard account when it comes to cheque books, debit cards, access to ATMs, online banking and regular statements. But no interest is paid on balances or charged on overdrafts, so banks will go after you on borrowing fees. You will often have to keep a significant amount in the account to avoid being charged. The minimum input for savings accounts can be far higher than other products and the "profit" rate – generated from sale and lease schemes rather than interest-based borrowing – is rarely market-leading. Once again, providers include Lloyds TSB, HSBC and IBB, but The Children's Mutual (www.thechildrensmutual.co.uk) also offers a sharia-compliant child trust fund.
Islamic investment products are booming and even the UK Government is rumoured to be considering a sukuk, or sharia-compliant bond. Conventional Western-style bonds offer investors interest payments on the sums invested. Sukuk bonds represent partial ownership of the underlying asset. Because the focus is on real assets, sukuk bonds protect investors from gearing or leverage – when the bond provider borrows against it to try to boost returns.
Meanwhile, Islamic-oriented equities seem to be weathering the economic storm far better than their mainstream counterparts, according to Standard & Poor's. "Equity markets around the world have experienced a turbulent start to 2008, with the S&P World BMI Index falling by 1.49 per cent in the second quarter of 2008," says Alka Banerjee of S&P. "But the S&P BMI Global Shariah Index delivered positive returns of 3.61 per cent over the same period. Financial stocks, whose poor performance has affected other indices, are largely excluded from sharia indices as they do not comply with Islamic law, so sharia investors have benefited."
New sharia-compliant products are now appearing in other areas of the market, too. This month has seen the official launch of Britain's first Islamic insurance company. Salaam Insurance (www.salaaminsurance.com, 0800 980 2445) offers sharia-compliant motor insurance policies by sharing the risk between policy holders. The takaful insurance allows participants to pay their contribution into a pooled fund which is then invested in sharia-compliant investments, with any profits put back into the fund. Claims are paid from the fund, and if there is any extra cash at the end of the year, it is distributed as a discount for the next year's premium. It has a more positive spin than the majority of insurance products on the market, as you may get something back for your money, rather than parting with your cash in the "hope" that you never have to claim it back. Salaam will offer home insurance, too, later this year.
There is also Cordoba Gold, a sharia-compliant prepaid card that is to be launched in mid-August. Targeting frequent travellers or those who often transfer money overseas, the card will have no interest payments, and will offer a credit-builder facility to help boost the client's credit rating by adding positive information to their credit file, using a gradually repaid loan rather than a monthly fee. More information will be available starting next month at www.cordobagold.com.
If you are looking for an easy list of what sharia does and does not mean for your finances, there is no straightforward answer. For most Muslims, the Koran and Sunna, the holy books, are open to interpretation by everyone. Although UK domiciled financial companies are regulated in their business dealings by the Financial Services Authority, they are guided in their sharia compliance by various scholars. This means that there is no absolute definition of what is and what is not considered sharia-compliant personal finance. So it's important to check each providers' processes before signing up.
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