Islamic Banking in the UK

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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

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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

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Sharia compliant liquidity management

• Excess liquidity of Gulf Islamic banks
• Unable to hold treasury bills
• No inter-bank market in Islamic securities
• Murabahah overnight deposits in London
• Saudi International Bank
• United Bank of Kuwait
• Significance of London Metal Exchange
• Learning experience
• Institute of Islamic Banking and Insurance

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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
• Housing finance
• 10-20 year Islamic mortgages
• Monthly or quarterly repayments on fixed basis
• Murabahah structure

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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

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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
• Stress on Islamic values
• Faith and trust
• Also aims at value and convenience

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Islamic Bank of Britain accounts

• Current account
• No interest payments or receipts
• Chequebook and multi-functional bank card
  provided
• Savings account
• Operates on mudarabah basis with 1 minimum
  balance
• Profits calculated monthly 3 since October 2004
• Term deposit savings account
• Minimum deposit 5,000
• One, three or six months earns 3.25, 3.50
  3.75
• Treasury deposit
• Minimum 100,000 for 1, 3 or 6 months
• Murabahah operation with funds invested on in
  London Metal Exchange

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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
• Secured funding
• Car finance
• Home finance coming soon

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Critique of Islamic Bank of Britain

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

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HSBC Amanah

• Dedicated Islamic finance subsidiary
• Established 1998 in London, but headquartered in
  Dubai
• Global network with focus on UAE, UK, US and
  Malaysia
• Amanah Home Finance
• Launched in 2004 following abolition of double
  stamp duty
• Islamic current account
• 1,000 minimum balance
• No interest payments or charges
• Multi-functional cards, standing orders and
  direct debits
• Islamic pensions
• Investment screening

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Lloyds TSB

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

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Costs of Islamic home finance,
Note Monthly payments for a loan of 135,000
over 25 years
13
Regulatory issues

• Financial Services Authority
• Stability of banking system
• Promoting public financial awareness
• Consumer protection
• Combating financial crime including money
  laundering
• FSA Islamic Finance Concerns
• 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

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Legal issues

• Flexibility of English law
• Advantages for Islamic financial contracts over
  civil law
• No separate Islamic banking law required in the
  UK
• Position of English courts
• 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

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Future for Islamic finance in the UK

• Competition
• A few dominant players in Islamic home finance
  market
• New product development
• 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