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
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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
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Excess liquidity of Gulf Islamic banks
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Murabahah overnight deposits in London
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Unable to hold treasury bills
No inter-bank market in Islamic securities
Saudi International Bank
United Bank of Kuwait
Significance of London Metal Exchange
Learning experience
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Institute of Islamic Banking and Insurance
The Al Baraka International Bank, 1982-93
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Initiative by Sheikh Salel Kamel of Jeddah
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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
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10-20 year Islamic mortgages
Monthly or quarterly repayments on fixed basis
Murabahah structure
The United Bank of Kuwait/
Al Ahli United Bank
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Islamic Investment Banking Unit
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Founded 1995
Semi-autonomous operation from Baker Street
16 staff in asset and leasing management
Manzil home ownership scheme
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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
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Innovative appeal
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Potential market
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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
UK has 1.8 million Muslim residents plus many visitors
Many Muslims in professional occupations with good
salaries
Stress on Islamic values
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Faith and trust
Also aims at value and convenience
Islamic Bank of Britain accounts
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Current account
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Savings account
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Operates on mudarabah basis with £1 minimum balance
Profits calculated monthly: 3% since October 2004
Term deposit savings account
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No interest payments or receipts
Chequebook and multi-functional bank card provided
Minimum deposit £5,000
One, three or six months earns 3.25%, 3.50% & 3.75%
Treasury deposit
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Minimum £100,000 for 1, 3 or 6 months
Murabahah operation with funds invested on in London Metal
Exchange
Islamic Bank of Britain finance
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Personal finance
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£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
Client’s agent sells commodities and proceeds
credited to client’s account
Client repays bank through deferred payments
Secured funding
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Car finance
Home finance coming soon
Critique of Islamic Bank of Britain
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Clear mission
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Publicity material
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All in English, but some clients may prefer Urdu or Arabic
Limited product range
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Vision and values well expressed
Stress on positive and not simply prohibitions
Primarily a savings institution that cannot meet all customer
need
Tawarruq difficult to market in UK as client scepticism
At fringe of market
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Very small bank competing with conventional banks offering
Islamic windows such as HSBC Amanah and Lloyds TSB
HSBC Amanah
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Dedicated Islamic finance subsidiary
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Amanah Home Finance
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Launched in 2004 following abolition of double stamp duty
Islamic current account
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Established 1998 in London, but headquartered in Dubai
Global network with focus on UAE, UK, US and Malaysia
£1,000 minimum balance
No interest payments or charges
Multi-functional cards, standing orders and direct debits
Islamic pensions
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Investment screening
Lloyds TSB
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Islamic current accounts
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No minimum deposit
Multi-functional cards, standing orders and
direct debits
Islamic home finance
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Diminishing musharakah structure
Rental calculated as LIBOR plus 1.09%
Compares with HSBC Amanah rate of 5.99%
Costs of Islamic home finance, £
Mortgage
provider
Conventional Islamic
Buildings
insurance
HSBC
Amanah
849
857
34
Lloyds TSB
781
883
21
Note: Monthly payments for a loan of £135,000 over 25 years
Regulatory issues
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Financial Services Authority
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Stability of banking system
Promoting public financial awareness
Consumer protection
Combating financial crime including money laundering
FSA Islamic Finance Concerns
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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
Legal issues
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Flexibility of English law
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Advantages for Islamic financial contracts over civil
law
No separate Islamic banking law required in the UK
Position of English courts
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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
Future for Islamic finance in the UK
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Competition
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A few dominant players in Islamic home finance
market
New product development
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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