Title: Islamic Banking in the UK
1Islamic 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
2Contents
- 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
3Sharia 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
4The 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
5The 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
6The 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
7Islamic 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
8Islamic 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
9Critique 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
10HSBC 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
11Lloyds 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
12Costs of Islamic home finance,
Note Monthly payments for a loan of 135,000
over 25 years
13Regulatory 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
14Legal 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
15Future 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