Money: Investment Islamic style

Paul Gosling looks at a new range of financial products for Muslims that don't breach the laws of the Koran
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The Independent Online
THERE ARE an estimated one and a half million Muslims living in Britain today, but their financial needs have not obviously been catered for by Britain's high-street financial providers.

Now, though, Muslims can buy their own homes without breaking the rules set out in the Koran, the Islamic holy book, which bans the paying or receiving of interest. And soon Muslims will also be able to take out pensions, obtain insurance and even earn a profit on money deposited without breaching the Koran's injunctions.

Research by the Islamic Investment Banking Unit (IIBU), a division of the United Bank of Kuwait, suggests there are about half a million potential customers for "Islamic" financial products in the UK. In the six months since it quietly launched its Islamic mortgage, it has made 30 home loans and is now processing a further 10.

Koranic law, called the Sharia, does not prohibit the making of money on capital invested but it does say that risks and gains must be shared between lender and borrower. A profit-sharing arrangement is acceptable.

IIBU's mortgage is what is called a Morabaha arrangement. The bank buys a home on behalf of its customer, to whom it immediately re-sells the property at a higher price. The client pays a monthly repayment fee. This might, for instance, mean that the home is purchased by the bank for pounds 100,000 and re-sold for pounds 140,000, with the customer repaying the higher figure over 15 years.

Sharia law allows another type of mortgage, which IIBU intends to offer in the future as well, using the Musharaka principle. Under this arrangement the bank again purchases the property, but sells a proportion of the home to the occupant, on an agreed schedule, at prevailing market values. Morabaha mortgages operate as fixed-rate loans, while Musharaka schemes effectively offer variable rates.

This is not the first Islamic mortgage available in Britain - and they are readily available in the Middle East - but it is the only one currently on offer here. The Albaraka Bank used to offer Musharaka mortgages, but it surrendered its banking licence in 1993 when tighter international banking regulations were introduced after the collapse of the infamous BCCI. Although BCCI attracted millions of pounds of investments from Muslims around the world, it did not adopt Islamic banking practices.

Albaraka still functions as an Islamic lender, financing trade with the Middle East, and it continues to service the Islamic mortgages it issued when it was a bank.

IIBU will not mortgage properties worth less than pounds 50,000, and it is currently not willing to offer remortgages. However, it intends to expand into this market in the future. It does not require customers to take out life assurance policies, recognising that many Muslims consider them a breach of Sharia law.

"There is always a difficulty with things like life assurance," says Keith Leach, manager of IIBU. "They provide for the family and for the future, but there is an element of them going against Allah's way, and insurers do not invest in line with Sharia." Borrowers are, however, required to take out buildings insurance.

Although IIBU can draw on heavy investments made by wealthy Arabs in the United Bank of Kuwait, the future of the British mortgage operation may depend on its ability to move into savings and investment products. It hopes in the next few months to launch pensions, insurance and savings products that conform to Sharia.

"We want to attract long-term savings," says Mr Leach. "Many Muslims at the moment put their money into ordinary [interest-free] current accounts because they have no other option."

There are, though, existing competitors for Sharia investments. Robert Fleming, the City of London investment bank, offers its Oasis fund which requires minimum investments of $50,000 (pounds 31,000) and has been producing returns of 9 to 10 per cent net. It is a share-based fund, but it boycotts companies that borrow heavily. The fund's Sharia board of Islamic academics rule out shares in tobacco manufacturers, publishers of pornography, brewers, distillers and retailers of alcohol - including supermarkets and hotels. It mostly invests in blue-chip US and UK corporations, including utilities and pharmaceuticals.

An alternative, which complies more closely with Sharia principles, is the Halal Mutual Investment Fund, managed by Al Tadamon Ltd and advised by Kleinwort Benson, which buys commodities and has a minimum investment of pounds 250.

Unfortunately for Muslims, it is impossible to operate purely in accordance with Sharia principles in Britain. "You can't judge anything as 100 per cent Islamic," says Dr Abdelkaber Chachi, of Britain's Islamic Foundation, and a specialist in Islamic finance. He adds that Musharaka arrangements fit more comfortably with the Sharia, than do Morabaha where the bank may not be genuinely sharing risk.

"But if the choice is between two evils then Muslims should go for the lesser evil."

q Contacts: Islamic Investment Banking Unit, 0171-487 6626; Albaraka, 0171-499 9111; Robert Fleming, 0171-638 5858; Al Tadaman, 01706 351111.