Islamic Banking in the UK

Professor Rodney Wilson, Durham University Institute for Middle Eastern and Islamic Studies Federation of Bosnia and Herzegovina, Islamic Banking and Finance Lecture Sarajevo, 8th May 2006

Contents

Sharia compliant liquidity management The Al Baraka International Bank, 1982-93 The United Bank of Kuwait/Al Ahli United Bank The Islamic Bank of Britain HSBC Amanah Lloyds TSB Islamic Islamic home finance costs compared Regulatory issues Legal issues Future for Islamic finance in the UK

Sharia compliant liquidity management

Excess liquidity of Gulf Islamic banks

Unable to hold treasury bills No inter-bank market in Islamic securities Saudi International Bank United Bank of Kuwait Significance of London Metal Exchange

Murabahah overnight deposits in London

Learning experience

Institute of Islamic Banking and Insurance

The Al Baraka International Bank, 1982-93

Initiative by Sheikh Salel Kamel of Jeddah

Purchase of Hargrave Securities in 1982 Licensed deposit taking via current accounts Two branches in London and one in Birmingham Deposits exceeded 154 million by 1991, mostly through mudarabah investment accounts 10-20 year Islamic mortgages Monthly or quarterly repayments on fixed basis Murabahah structure

Housing finance

The United Bank of Kuwait/ Al Ahli United Bank

Islamic Investment Banking Unit

Founded 1995 Semi-autonomous operation from Baker Street 16 staff in asset and leasing management

Manzil home ownership scheme

Murabahah based mortgages from 1997 Ijara based mortgages from 1999 Around 2 per week approved by late 1990s Now distributed through West Bromwich mortgages

The Islamic Bank of Britain

Innovative appeal

First branch opened September 2004 in Edgeware Road Operational headquarters in Birmingham with branches Leicester and Manchester Opening generated much favourable media comment and free publicity

Potential market

UK has 1.8 million Muslim residents plus many visitors Many Muslims in professional occupations with good salaries Faith and trust Also aims at value and convenience

Stress on Islamic values

Islamic Bank of Britain accounts

Current account

No interest payments or receipts Chequebook and multi-functional bank card provided Operates on mudarabah basis with 1 minimum balance Profits calculated monthly: 3% since October 2004

Savings account

Term deposit savings account

Minimum deposit 5,000 One, three or six months earns 3.25%, 3.50% & 3.75%
Minimum 100,000 for 1, 3 or 6 months Murabahah operation with funds invested on in London Metal Exchange

Treasury deposit

Islamic Bank of Britain finance

Personal finance

1,000 to 20,000 for 12 to 36 months Operates through tawarruq with bank buying shariah compliant commodities that are sold to client on a cost plus profit basis Clients agent sells commodities and proceeds credited to clients account Client repays bank through deferred payments Car finance Home finance coming soon

Secured funding

Critique of Islamic Bank of Britain

Clear mission

Vision and values well expressed Stress on positive and not simply prohibitions All in English, but some clients may prefer Urdu or Arabic Primarily a savings institution that cannot meet all customer need Tawarruq difficult to market in UK as client scepticism Very small bank competing with conventional banks offering Islamic windows such as HSBC Amanah and Lloyds TSB

Publicity material

Limited product range

At fringe of market

HSBC Amanah

Dedicated Islamic finance subsidiary

Established 1998 in London, but headquartered in Dubai Global network with focus on UAE, UK, US and Malaysia Launched in 2004 following abolition of double stamp duty

Amanah Home Finance

Islamic current account

1,000 minimum balance No interest payments or charges Multi-functional cards, standing orders and direct debits
Investment screening

Islamic pensions

Lloyds TSB

Islamic current accounts

No minimum deposit Multi-functional cards, standing orders and direct debits Diminishing musharakah structure Rental calculated as LIBOR plus 1.09% Compares with HSBC Amanah rate of 5.99%

Islamic home finance

Costs of Islamic home finance,

Mortgage provider
HSBC Amanah Lloyds TSB

Conventional Islamic

Buildings insurance

849

857

34

781

883

21

Note: Monthly payments for a loan of 135,000 over 25 years

Regulatory issues

Financial Services Authority

Stability of banking system Promoting public financial awareness Consumer protection Combating financial crime including money laundering Capital adequacy, liquidity, reputation of directors and management Insistence on shariah endorsement for designated Islamic financial products Deposit protection provided problems Participates as observer on IFSB and IOSCO taskforce on Islamic finance

FSA Islamic Finance Concerns

Legal issues

Flexibility of English law

Advantages for Islamic financial contracts over civil law No separate Islamic banking law required in the UK Shamil Bank of Bahrain versus Beximco Pharmaceuticals of Bangladesh Failure of the latter to make a payment under a murabahah agreement Judgement of the High Court and the Court of Appeal

Position of English courts

Future for Islamic finance in the UK

Competition

A few dominant players in Islamic home finance market Takaful Islamic insurance Shariah compliant pension schemes Shariah compliant open and closed end funds Scope for Islamic private equity, real estate investment trusts (REITS) and possibly hedge funds

New product development