UK banks bow to the Muslim pound

At last, savings accounts, loans and mortgages are being offered that comply with Islamic law. Esther Shaw reports
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The Independent Online

Faith, it is said, can move mountains, and the UK's high-street banks are feeling its power.

Faith, it is said, can move mountains, and the UK's high-street banks are feeling its power.

Britain's burgeoning Muslim population is now nearly two million strong but has largely been sidelined by mainstream banks as lenders struggle to create financial products that conform to Islamic Sharia law. This forbids followers from paying or receiving interest, for the earning of interest on money for no effort is against the principles of Islamic banking.

This impasse is about to be broken, however. As a wealthy Muslim middle-class grows in size, with plenty of money to save and invest, banks are slowly waking up to the possibilities of Islamic finance and preparing to offer new products that fit with its beliefs.

Over the past four weeks, Lloyds TSB has launched both a current account and mortgage that comply with Sharia law.

The account pays no interest and charges no interest because there is no overdraft on offer. With the mortgage - a five-month pilot project in five branches in London, Birmingham and Luton - the bank buys the home for the customer, who in turn pays for it with a fixed monthly sum plus rent.

Other deals include a Bristol & West mortgage in a tie-up with the Arab Banking Corporation, launched last May, and a pension fund available from HSBC's Amanah finance division. This tracks an index of the top 100 companies engaged in Sharia-compliant activities - avoiding shares in areas such as conventional finance (including Western banks), tobacco, pornography and gambling.

And the Islamic Bank of Britain opened its first branch in London last year and now offers a current and savings account as well as a personal loan that makes an arrangement charge instead of piling up interest.

The Chancellor, Gordon Brown, has been busy too. His recent Budget brought tax on Islamic financial products into line with their conventional Western counterparts by scaling down the number of different tax charges.

In 2003, in an effort to create a more level playing field for all customers, he also abolished "double stamp duty" for Muslims who were either buying or selling a property. Before, under Islamic financial schemes, they had to pay the tax twice both at the time of purchase and again when they came to sell up.

Muslims have not just sat on their money up until now, of course. Many have compromised, using Western products to buy property and to save money. Nearly three-quarters of Muslim-owned homes in the UK two years ago were financed by a conventional mortgage.

Trying to operate Islamic banking in the UK is a difficult task for providers, which have to comply with both Sharia law and the UK's regulatory requirements for the financial services industry.

One of the problems has been the complexity and extra cost of specialist products that require UK banks to take steps to avoid earning interest.

To tackle this issue, Lloyds TSB's new mortgage uses a finance deal called Ijara which operates using Diminishing Musharaka - joint ownership by the lender and the customer. The bank must first buy the property outright and can contribute up to 90 per cent of the overall purchase price. The customer then gives the outstanding amount upfront to the bank - at least 10 per cent - and repays the balance over an agreed term together with a rental payment.

Since there is no interest to pay, it is difficult to calculate the costs of such deals for comparison with mainstream products. However, industry estimates suggest that they tend to work out at 1 per cent more than a standard home loan.

The problem of interest earned on money is particularly complex for savings products.

The Islamic Bank of Britain offers savings accounts run on a principle known as Modaraba, where a profit-sharing agreement is struck between the bank and the customer.

Rather than earn interest on their deposits, savers rely on the bank to use their funds to trade in Sharia-compliant investments and then share out the profits.

The recent Budget changes on levelling taxation could make the returns on this product as competitive as on conventional accounts, says bank spokesman Michael Hanlon.

Still greater complexity applies to the Islamic Bank of Britain's personal loans although, as with conventional UK unsecured deals, customers can borrow between £1,000 to £20,000 and repay it over 12 to 60 months.

Under this scheme, the lending bank buys commodities such as gold and sells them to the customer at a cost that includes its own profit from the deal. Next, an independent agent sells these same commodities back to the market on the customer's behalf and puts the resulting cash into the customer's account.

Over time, the individual then repays the cost of the original commodities in the form of monthly payments.

"[Overall], the banks are improving and the products are no longer extortionate," says Sher Khan, a spokesman for the Muslim Council of Britain.

"But providers have yet to be imaginative with Muslim finance," he adds. "They are still trying to fit it into the mainstream rather than developing it in a context of its own."

This is visible in the lack - so far - of a Sharia-compliant child trust fund, although providers such as HSBC say they are working hard to draw up such a product.

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