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.
Dirty tricks in a divorce can cause some nasty surprises
10 tips for taking out a personal loan
Simon Read: Frozen in time - the expat British pensioners who deserve a better deal
Donald MacInnes: My wasted hours in the retail deserts of Dixons-Carphone
Pension firms must ask consumers more questions, says City Watchdog
- 1 Saudi preacher who 'raped and tortured' his five -year-old daughter to death is released after paying 'blood money'
- 2 Michelle Obama highlights harsh restrictions faced by Saudi women after meeting King Salman without wearing a headscarf
- 3 Amal Clooney gives excellent response to fashion question at European Court of Human Rights
- 4 A bottle of wine a day is not bad for you and abstaining is worse than drinking, scientist claims
- 5 Isis publicly behead man in Syrian town square for 'insulting Allah' as he screams for help
9 reasons Greece's experiment with the radical left is doomed to failure
'We would evict Queen from Buckingham Palace and allocate her council house,' say Greens
Greece elections: Syriza and EU on collision course after election win for left-wing party
British Muslim school children suffering a backlash of abuse following Paris attacks
British grandmother Lindsay Sandiford faces execution by firing squad in Indonesia
Liberal Democrat minister defends comments suggesting immigration causes pub closures
iJobs Money & Business
£13000 per annum: Recruitment Genius: This Pension Specialist was established ...
£23000 - £26000 per annum + Benefits: Ashdown Group: Market Research Executive...
£25000 - £35000 per annum: Recruitment Genius: A Technical Report Writer is re...
Competitive salary & benefits!: MBDA UK Ltd: MBDA UK LTD Indirect Procurement...
Day In a Page
Hibernate during winter and make your living during the summer at this busy guesthouse with panoramic sea views, in the village of Lynton
A four-bedroom penthouse next to the Tate with direct views of St Paul's from two floors of luxurious living space
A four-bedroom detached home surrounded by spacious gardens and woodland, close to New Pudsey
An 18th-century, three-bedroom home near Langstone Harbour built from ships beams with vaulted ceilings and wood burning stoves
A five-bedroom semi-detached home with a mix of period and modern features in a popular and convenient location
This five-bedroom red-brick beauty overlooks the village green and sits in just under two acres of land
A three-bedroom villa with self-contained flat, minutes from Lake Windermere
A deceptively spacious, beautifully presented Georgian home with 3000sq ft of living space and five reception rooms
A five-bedroom Victorian home with four receptions, superb gardens and paddock in Pembury
An eight-bedroom house on the south side of the The Green with cinema, wine cellars and summer house
This 17th century beauty is full of rustic cosiness, while the detached home office means you can also run a business
Four exclusive apartments in a Grade II-listed former medical school with 2,275 sq ft of living space and 18ft ceilings
A five-bedroom terraced house on the popular Peterborough Estate, ideally located for both Eel Brook Common and South Park
A state-of-the-art farm-building conversion on the former Cliveden Estate, with 11,420sq ft of internal space, cinema and wine cellar
A three-bedroom, 15th-century cottage with original features in the picturesque village of Sissinghurst
A six-bedroom terraced house with large south-facing roof terrace, cinema room and wine cellar
A new seven-bedroom home built in Queen Anne-style with swimming pool and parkland views in Mortimer
A listed, four-bedroom farmhouse in the rural hamlet of Rushall with detached barn, four acres of gardens and paddocks
A first-floor flat with two bedrooms, a spacious reception room and communal grounds in a leafy part of London
A three-bedroom flat with a spacious rootop terrace and balcony, accessed from a private gated courtyard
A Grade II-listed pile with six bedrooms, stables and 39 acres of grounds in Standlake
A two-bedroom flat with boutique hotel-style interiors, close to the foodie haunt of West End Lane
A two-bedroom flat in a beautiful old vicarage, with many original features, close to the city centre
A three-bedroom 16th-century home with an aga kitchen, private gardens and heated outdoor pool, in Hadleigh
A three-bedrom home in sought-after Queen's Gate Mews, with Italian marble-finished bathrooms
Surrounded by glorious countryside in the village of Udimore, sits this impressive four-kiln oast and barn conversion
A five-bedroom house in the picturesque village of Kettlewell, north Yorkshire
An 18th-century former coaching inn with original staircase, open fireplaces and beams throughout
A Grade II-listed Georgian town house with three bedrooms and a south-facing courtyard, near Arundel Castle
Feel on top of the world at this über chic penthouse on the 37th floor of one of Europe’s tallest blocks.
A Grade II-listed Victorian villa with six bedrooms and two further cottages, all with spectacular sea views
A grade II-listed, Georgian cottage with mature 50ft garden, perfect for summer entertaining
A magnificent Georgian pile with turrets, seven bedrooms, a heated pool and four acres of gardens
Fairoak Farm has five bedroom suites, gym, outdoor swimming pool and golf course
Chic two-bedroom river-fronted flat with a private lift that delivers you directly to your home
A spectacular seven-bedroom Tudor pile, once owned by Henry VIII, with 18 acres of land
A seven-bedroom Georgian property previously used as a picturesque wedding venue
A split-level flat in a church conversion with two en suite bedrooms and 1,200sq ft of living space
A three-bedroom bungalow situated behind an impressive stone wall, £645,000
Windsor Castle overlooks this three-bedroom Victorian cottage located on one of Windsor's smartest roads
Chapel House is a former vicarage with nine bedrooms in the beautiful Upper Wye Valley
A five-bedroom B&B and separate owner's accomodation with potential for conversion
Enjoy summer by the Thames in this two double-bedroom converted warehouse in Rotherhithe village