Keith Leach

UK’s economy is seeing a further deterioration, with a deepening recession, banking bail-outs and big-name retailers going bust. However, one sector of the market still active is Islamic Finance which is now both cheaper and more accessible. Most recently, alburaq, a UK Islamic ‘mortgage’ provider, has responded to interest-rate cuts by improving its range of Shari’ah-compliant Home Purchase Plans.

‘Our new product range means our new customers now have products priced from the equivalent of 5.49% on their home finance,’ explains Keith Leach, Head of alburaq. He continues: ‘The new year could bring even lower rates for our customers. If rates continue to fall as predicted, from March 09 many of our customers could be paying a rate equivalent to 4.5% or less.

In addition to the improving prices, there are plenty of other advantages for those choosing alburaq’s Islamic alternative. Recently, banks have been criticised for varying margins; imposing collar rates and reducing the range of mortgage products they offer. ‘Collar rates’ have made the headlines recently as many mortgage holders have discovered to their cost that their mortgage payments will not fall inline with the general drop in rates.

alburaq works very differently, as Leach explains: ‘When applying for a mortgage, the public would be well-advised to study carefully what margin will be applied, for how long it is guaranteed and whether there is a ‘collar’ rate. One of the distinguishing features of our products is that we fix our margins so these are clearly known from the outset and we don’t have a ‘collar’ on our rates. In addition, we don’t tie-in our customers for when we offer incentives, like fees assisted or cashback offers. We also allow unlimited overpayments, which isn’t always available with other Islamic or conventional mortgages.’

Leach continues: ‘Unlike many of the UK banks, we continue to offer a full range of products and we are still offering buy-to-let finance – which has almost disappeared from the conventional market.’

About alburaq

Alburaq is a brand name belonging to ABC International Bank plc (a subsidiary of the Arab Banking Corporation), a major Middle-Eastern banking group in which government agencies of Kuwait, Abu Dhabi and Libya have significant share-holdings. ABC was founded in 1980, and is headquartered in Manama, Bahrain. The Group has a well-established international network including offices in Paris, Milan, Frankfurt, London and of course the Arab world. ABC Group is one of the largest banks in the Arab world, with assets totalling approximately US$33 Billion (December 2007).

Islamic banking is a faith-based system of financial management, which derives its principles from the Shari’ah – Islamic ethics derived from three sources: the Holy Qur’an, the Hadith (sayings of the Prophet Muhammad pbuh) and the Sunnah (practices and traditions of the Prophet Muhammad pbuh).

For Muslims, giving or receiving interest (known as ‘Riba’ in Arabic), is strictly forbidden. All of alburaq’s products are free of from Riba, and operate in accordance with Shari’ah principles. Prior to launch, all alburaq products are reviewed by a Shari’ah Supervisory Committee (SSC), composed of respected Islamic scholars. Products are only launched once their structure and associated contracts have been approved by the SSC.

The Islamic Bank of Britain (IBB) has launched a dedicated website for mortgage advisers and IFAs which offers Sharia compliant home purchase plans and commercial property finance.

The website aims to enable advisers to re-sell IBB’s Sharia compliant products, with registered intermediaries able to submit leads and applications to the bank online, track the progress of deals and access printable copies of product literature.

Registration to the site is free and subject to compliance checks. However, only agents who are Financial Services Authority (FSA) regulated for the home purchase plan can use the full application and tracking service.

Intermediaries can introduce business to IBB in two ways: the referral of basic customer contact details, which pays a 0.2 per cent procuration fee for completed business; or a completed online client application, which pays a procuration fee of 0.35 per cent.

Advisers are also offered support from regional sales consultants who can guide agents through the application process and explain how IBB’s products differ from conventional finance products. The bank also has a dedicated helpline for intermediaries.

Sultan Choudhury, the commercial director at the IBB, said: “Our unique position, as the UK’s only Islamic Retail Bank, has meant we have remained largely insulated from the credit crunch. “As a result, British consumers are increasingly considering products such as the home purchase plan.”

Source: FT Adviser, December 16, 2008

Global Vision 2000 the independent international think-tank is hosting an emergency conference on the Global Financial Crash and a sustainable future for humanity”. This will take place all day on Saturday 13th December 2008 in London at 43 Lancaster Gate. An emergency conference is being called to address the unprecedented “black swan” event of the unfolding global financial crash. All attempts by the Government are failing to resurrect a bankrupt financial sector and the financial collapse will deepen with more bubbles expected to burst and impacting severely on the real economy. The economy is being haemorrhaged, asset prices are plunging, banks are insolvent, mass unemployment stalks the land and social strife beckons.

It is time to ask what is really going on ? The conference will be presenting an unique diagnosis and prescription which the Government, politicians and media need to heed. There needs to be a dialogue with those who have a holistic, radical and sustainable prescription for finance, the economy and society. As we are fast facing the final or finest hour of humanity there is a need to move to nothing less than an “Universal Paradigm shift” which liberates our money, banks and economy from neoliberal free market fundamentalism, financial usury capitalism, bankers and debt bondage.

The UK’s leading monetary reformers and sustainability experts will be gathering to present radical solutions, solutions which address the fundamental causes as opposed to symptoms. Bailouts to those who have caused the problem in the first place is an outrage and partial nationalisation will not do. So what needs to be done for the common good? You are invited to end the dialogue of the deaf, dumb and blind as we will not get out of this prolonged crisis until fundamental change inherent in a paradigm shift is envisaged.

Canon Peter Challen, Daud Pidcock, Muhammad Rafeeq, Alistair McConnachie, Tarek el Diwany, Jamal Harwood,  Nafeez Ahmed,  Dr.Irfan Alawi,  Dr.Mustafa Ali,  Francis Malleady, Roy Tindle and Robert Corfe will be making powerful presentations as a community of collaboration presenting viable alternatives which need to move from the fringe to the mainstream. Daud Pidcock will be launching his magna carta “The other Road to serfdom” and Robert Corfe his “Social Capitalism”. This movement is destined to gather momentum and you are invited to listen and pay heed and become part of the solution rather than the problem. Join your hands and lend your ears for the day with us.

The Editors

Full details of the conference (Pdf)

For further details :
Contact : Tel. : 07818 082011 or 07988785331
Email : myaseen@globalvision2000.com
www.globalvision2000.com

ACCA is the global body for professional accountants, with 325,606 students and 122,426 members in 170 countries worldwide. A recent ACCA paper – Islamic Finance : An Ethical Alternative to Conventional Finance ? – explores the basic tenets of Islamic finance, the role of the UK in leading its development and whether it is a serious alternative to conventional finance.

Once seen as a marginal industry by some, Islamic finance is now recognised as a vital and thriving market. It has been widely acclaimed as the fastest growing sector within the world of finance and positions itself as an alternative model. Some suggest much of the current problems might have been avoided in an Islamic system (for example, because short selling and derivatives are generally prohibited). Advocates of this view point to the fact that funds adhering to Islamic (Shari’ah) investment principles have so far avoided the worst effects of the credit crisis.

ACCA has the most diverse student and member base amongst the world’s accountancy bodies, thousands of whom live in countries with a thriving Islamic finance market in the Middle East, Malaysia and Pakistan. This is why ACCA is keen to play its part in increasing the understanding and development of this sector.

• Richard Aitken-Davies is the President of The Association of Chartered Certified Accountants ACCA. Among the main points he emphazises on regarding the Islamic finance sector :
• the need to raise awareness of the principles of Islamic finance, with particular emphasis on the embedded principles of ethics and social responsibility
• further development of Islamic finance will require a wider range of products to stimulate competition and provide the best service to the public
• while it is not possible for UK regulation to distinguish Islamic finance from other forms of banking on a non-secular basis, there is a need to ensure a level playing field as far as possible
• however, Islamic banks are not a panacea – they are increasingly beginning to feel the effects of the slowdown, due to the interconnection with the global financial system.
  

Source: ACCA Global Blogs

La Banque islamique européenne d’investissement (EIIB) basée à Londres vient d’investir £ 1,8 million dans la société sud-africaine DiamondCorp, laquelle intervient dans l’extraction du diamant. EIIB avait lancé en avril dernier un fonds de private equity basé sur les règles de la charia.

EIIB announces private equity investment in DiamondCorp

European Islamic Investment Bank plc (“EIIB”) announces that its Private Equity business has invested £1.8 million in DiamondCorp plc (“DiamondCorp”), the South African diamond mining company.  Following the investment, EIIB will have a 9.735% shareholding in DiamondCorp.  DiamondCorp will offer to EIIB representation on DiamondCorp’s Board.

EIIB launched its Private Equity and Corporate Advisory business in April 2008 to invest in Sharia’a compliant private equity transactions.  The business, headed by Robin Henshall and supported by Marcus Scott, focuses on Europe, the Middle East and Africa and targets the Natural Resources, Energy, Agriculture, Real Estate, Transport & Logistics, Consumer Luxury Goods, Retail and Support Services sectors.

DiamondCorp is a South African diamond mining company listed on the Johannesburg Stock Exchange and the AIM market of the London Stock Exchange.  The Company is developing the Lace kimberlite mine (“Lace”) and the project, which is more than twelve months ahead of schedule, will begin mining before the end of 2008.  At peak production, Lace is expected to produce more than 500,000 carats of gem diamonds per year.

Robin Henshall, Head of Private Equity and Corporate Advisory, said: “We are delighted that our Private Equity business has already delivered its first investment.  DiamondCorp is a perfect example of our target strategy; the company has a highly experienced management team, the business is producing revenue and the profit potential is highly attractive.  The diamond market has strong underlying fundamentals, including the long-term supply shortage which, we believe, will lead to a strengthening in diamond prices.  DiamondCorp has excellent prospects and EIIB’s investment will enable the Company to maximise its potential.”

Source : EIIB

Islamic finance principles may be a thousand years old but they have attracted the attention of the West only recently. Now business schools are offering specialist masters programmes on the subject.

While the world’s financial systems are shaken to their foundations, global stock markets tumble and thousands of bankers are made redundant, one area of finance goes from strength to strength. Islamic banking and finance principles may be a thousand years old but they have attracted the attention of Western financial services companies only recently. Now business schools are offering specialist masters programmes on the subject.

Islamic banking and finance must comply with Islamic law, or Sharia. This is governed by a number of fundamental principles and prohibitions and there are many differences from conventional finance.

“There is the absolute prohibition on the charging of interest,” says John Board, director of the International Capital Market Association (ICMA) Centre, part of Henley Business School at Reading University. ICMA runs an MSc in investment banking and Islamic finance, taught jointly with the International Centre for Education in Islamic Finance in Kuala Lumpur. “This leads to the question: how do you raise money in a way that is commercially sensible but does not involve paying interest?

“And on the investment side, there is a range of prohibited activities. For example, Islamic investors may not invest in businesses that trade in alcohol or pork-related products, or are involved in certain types of entertainment.”

Other restrictions include not being able to sell something unless you own it, or to invest in companies with high levels of debt. Taking all the restrictions into account, many conventional financial products, such as deposit accounts, mortgages, credit cards, insurance, bonds and many derivatives, such as futures and options, are out of bounds to Islamic investors.

Until recently, certainly in non- Islamic countries, there was little on offer for people who wanted Sharia-compliant banking and finance. However, substantial growth in this market over the past five to ten years, partly driven by Middle Eastern countries investing oil revenues, means more institutions are beginning to offer appropriate products and services. Islamic assets under management are about £400 billion, according to the Islamic Financial Services Board, an industry body.

Today Islamic finance and banking touches everything from large capital infrastructure projects to retail banking. HSBC in the UK, for example, has Sharia-compliant bank accounts and mortgages. And the increase in Islamic finance activity means there is a need for postgraduates with knowledge in this area. “There is a big demand for Islamic finance as a professional activity,” Board says.

Bangor Business School, at Bangor University in Wales, has launched a one-year full-time Islamic banking and finance MSc. “The aim is to provide students with an understanding of the key principles, products and services,” says Philip Molyneux, professor of banking and finance and the school’s head.

“The Islamic banking module, for example, starts by looking at the theoretical foundations and development of Islamic banking practices, the key features of different types of products and how products are offered without charging interest.”

Another module focuses on Islamic finance. “That looks at financial instruments, for instance investing in mutual funds, and what are and are not permitted investments.”

The Bangor programme also covers conventional banking and finance, as does the programme delivered at the ICMA Centre. Several other business schools offer an Islamic finance orientated elective as part of a general finance MSc.

Employment prospects are looking good. Despite the fallout from the credit crunch, Islamic finance specialists are much in demand, both in the Islamic world and in non-Islamic financial firms.

Source :  Steve Coomber, Times Online, December 3, 2008

IREF ‘08, London December 16-17, 2008
Access to the GCC, islamic direct equity & finance
Building Bridges for Future GCC and UK Real Estate Relations

The current turmoil in the global financial markets may have dented investor confidence and precipitated investor caution in the short-term, but for the discerning, specialised and bespoke investor there are some surprisingly good deals in the global real estate market.

The current market conditions especially the fall in the volumes of real estate transactions, says Tony Horrell, CEO, European Capital Markets, is “driven by global credit conditions which made debt both less available and more expensive… It may well take another year before debt markets stabilize and in the meantime we are likely to see increased distress selling. High growth markets perceived as oversold are likely to attract the most attention from buyers. With the high velocity of pricing change come opportunities for buyers. The range of opportunity will increase for those able to commit equity in the next 12 months.”

This spells good news for Middle East investors flush with huge reservoirs of petrodollar liquidity. They are targeting real estate investments through equity ownership, joint ventures and mezzanine positions. However, some analysts warn that many GCC investors are ‘ego buyers’ looking for marquis assets that have “impressive curb appeal and locations that quite simply can’t be replicated”.

The UK, a traditional real estate investment location for the GCC countries, remains an attractive hub especially for Islamic real estate financing and investments. The UK and GCC have a historical and long relationship in economic cooperation and investment. The UK is also the single largest provider of expertise in banking, legal, consultancy and accounting services to the GCC countries including in the specialised area of Islamic financing.

A recent report from Moody’s Investors Service confirmed that in the wake of the US subprime housing crisis, London offices have deteriorated faster than any other European property market. Banks in the City and West End have been hard hit by the turmoil in the financial markets with resultant job losses being incurred. Resultantly, office take-up levels are unlikely to reach forecasts.

“Despite the financial turmoil, occupier demand remains relatively robust… however occupier demand could be negatively affected if the financial turmoil continues,” said Rod Bowers, co-author of the report.

Real estate market sentiments are echoed by other GCC institutions such as Kuwaiti investment bank, Global Investment House (GIH), in their homes markets as well. In August 2008, GIH launched a US$500m Islamic real estate fund, Global GCC Real Estate Fund II, aimed at providing opportunities for GCC, regional and international investors to tap into the flourishing GCC real estate sector.

Real estate has always been a key component of the GCC and Middle East economies. While an endless stream of luxury leisure-cum-commercial developments and residential-cum-golf and leisure projects have proliferated over the last few years, the new trends suggest a move also to the housing sector to satisfy demand of a rising and young regional population; for the lower-end affordable housing sector; and for specialised industry-cum-infrastructure real estate.

GFH, for instance is leading with its energy hub concept – it started the Qatar Energy City Project and exited at a good return; it has launched similar multi-billion dollar ventures – the India Energy City, Energy City Libya and the Caspian Energy Hub in Kazakhstan. More recently, it has expanded the concept to steel – launching the Hadeed Mena Project which would see steel plants in several MENA countries aimed at providing an anticipated growth in demand for steel and steel products die to increased project spend.

Indeed, a recent GFH report projects oil revenues of the six Gulf Cooperation Council (GCC) countries to top US$600bn annually for 2008 and 2009 alone. Aggregate GCC expenditure is expected to reach US$300bn in 2008 and private sector projects currently underway and on the drawing board is valued at over US$2 trillion. Private liquidity in the GCC alone, according to several estimates, is put at US$1.2 trillion.

However, the GCC market is not all about high liquidity and spend. The GCC states are not immune to the effects of the global financial markets turmoil. GCC markets are also feeling the effects of high food prices as import dependency and prices continue to rise. Residents of GCC cities complain about skyrocketing rents, food prices and transport costs.

Speculators the world over are the same. The GCC is no exception. As such governments are intervening with new laws to curb speculation and excesses in a real estate market which analysts say is ripe for a correction. In June 2008, the Shura Council of Saudi Arabia approved a new mortgage law which should be adopted before the end of 2008. The mortgage law deals with commercial and residential property and should open the way for greater real estate financing flows in the country.

In September, Dubai passed a Mortgage Law and Law No 13 of 2008, which regulates initial property registration and requires all off-plan sales contracts to be registered with the Dubai land Department and the Real Estate Regulatory Authority – aimed at curbing speculation in the market.

Several factors influence the real estate sector in the GCC and MENA countries. These include:

• The huge growth in oil revenues and liquidity which in turn has spurred huge project, infrastructure and development spend
• The spectacular rise in Sovereign Wealth Funds (SWFs). The IMF estimates the current total volume of assets under management by the SWFs at US$2 trillion -US$3 trillion, projected to rise to US$6 trillion – US$10 trillion within the next five years. Abu Dhabi, Singapore, China, Norway, Kuwait and Saudi Arabia have the largest SWFs in the world. While asset allocation of SWFs are primarily in government bonds and commodities, there may be diversification into other asset classes including specialized real estate assets.
• The GCC region has one of the highest population growth rates in the world. Some 60 per cent of the Saudi population of 24 million is under the age of 25 years old. As such the demand for housing and consumer goods is expected to increase heavily over the next few years.
• There is plenty of low cost financing available including from specialized government funds which effectively subsidise the sector. The International Finance Corporation (IFC) has already set up an Islamic mortgage company joint ventures in Saudi Arabia and Egypt to facilitate greater flows of such affordable financing to ordinary people.
• The new mortgage and other laws will provide greater protection to investors and consumers alike. As such this will act as a catalyst for more banks entering the mortgage market.
• Attractive FDI incentive regimes with full repatriation of capital.
• The availability of innovative financing especially Islamic financing for the housing and real estate sector.

With all these market dynamics, IREF 2008 could not have come at a more opportune time. Real estate will always remain an attractive investment asset class for Middle East investors both in the region and out of the region.

As such IREF 2008 is the real estate event directed to anyone interested in the real estate market in the UK and GCC whether as a regulator, player, financier, structurer, investor, speculator, analyst or simply as an interested part.

GCC realty companies adopt ‘positive survival’ strategies through recapitalisation, retrenchment and restructuring

In the wake of the credit crunch and the global economic slowdown, real estate companies especially in the Middle East are increasingly adopting strategies of positive survival with the projection that by end 2009 through to 2010 the recession would have bottomed out and GDP growth would start getting back on track.

These strategies imply that companies in general are concentrating on consolidating core business and not venturing into new showcase projects. But, this does not mean that flagship developments already planned in less affected markets are being put on hold.

In the Gulf Cooperation Council (GCC) markets, especially Dubai and Bahrain, the real estate sector has embarked on a three-pronged policy of recapitalisation, retrenchment and restructuring – recapitalisation through IPOs and other capital raising exercises; retrenchment through cutting back on some jobs; and restructuring through prioritising or even suspending projects to suit the current economic cycle and market dynamics.

Realty companies in the GCC region, however, remain optimistic in an era of doom and gloom in other markets. Judging by the spate of new projects announced over the last few months, albeit much more measured, Saudi Arabia, Kuwait, Qatar, Oman and Abu Dhabi remain active and buoyant markets for both inward and outward investments in the real estate sector. Affordable housing similarly is emerging as a priority sector especially as more countries in the region introduce mortgage laws and other legislation to curb housing speculation and to provide greater security to developers, mortgage providers and customers.

Recent reports that the Qatar Investment Authority (QIA), the emirates sovereign wealth fund (SWF), is planning to build up portfolios of investments in prime real estate properties in international cities such as New York, London and Tokyo that have been affected by the adverse impact of the global financial crisis, have also boosted the markets.

The above issues, including prospects for Shariah-compliant real estate financing and several others, will in fact be discussed at the International Real Estate Finance (IREF) 2008 Summit organised by ICG-Events along the theme Building Bridges for Future GCC and UK Real Estate Relations, and which is due to be held on the 16th-17th December 2008 at the Park Plaza Hotel in London, UK.

The summit will discuss several pertinent topics and issues including global economic and real estate market dynamics; challenges and opportunities in the UK real estate market; key real estate trends in the GCC countries; structuring real estate products; Issues relating to structuring Shariah-compliant real estate transactions; FDI flows into and out of the GCC real estate sector; a GCC real estate market players panel discussion (a first for any such summit); and a Shariah Scholars panel discussion, which has always proved very popular at past IREF summits.

Saudi Arabia remains by far the most attractive real estate market for foreign investors. Leading international property consultants, such as Strutt & Parker and Jones Lang LaSalle (JLL) have recently formally launched offices in the region. Blair Hagkull, JLL Managing Director for Middle East and North Africa, is confident that the Saudi realty market will grow significantly over the next few years and is currrently the fastest-growing market in the world. Indeed, JLL reports that investors from Malaysia, China, Singapore, North America and other Asian countries are increasingly interested in investing in the real estate market in the Kingdom.

Indeed a survey of real estate market professionals conducted in October 2008 by JLL and Cityscape Dubai concluded that Saudi Arabia is set to become the best regional performer in the real estate sector in the next three years, with yields projected in excess of 8.5% per annum for prime commercial assets and higher for specialized assets such as hospitality.

Source : ICG London (Islamic Conference Group)

The Islamic Bank of Britain (IBB) has launched a new rate of 5.49 per cent for its Home Purchase Plan, the Shariah compliant alternative to a mortgage. This rent rate is the lowest ever for a Shariah compliant mortgage alternative in the UK, and refinance customers will also be given free valuation and legal fees of up to £1,200.

The scheme is aimed at both refinancing customers and new purchasers, and the new rental rates will begin at 5.49 per cent. The 5.49 per cent rent rate is available for refinancing deals up to a maximum finance-to-value (FTV) of 70 per cent. The same rate also applies to new purchases with a maximum FTV of 80 per cent.

There is a one-off administration fee of £299 on both products and limit on the amount of loan with a minimum of £70,000, and maximum of £750,000 finance. The rental rate is discounted until the end of March 2010 and there are no penalties for making extra capital payments, unless the whole balance is repaid.

Sultan Choudhury, commercial director at IBB, said: “Despite the recent market turmoil Islamic Banking is considered by many as a stable alternative to conventional finance providers, which are struggling under the strain of the credit crunch. “With these fantastic new Home Purchase Plan (HPP) rates, Islamic Bank of Britain can now be seen as both a safe and affordable alternative to the conventional mortgage.”.

Source: Financial Times

NatWest bank has launched its first halal mortgage product, which is compliant with Shariah (Islamic) law. The new mortgage product available from NatWest Business Banking is for commercial properties and has been launched in response to strong customer demand and is specially tailored to the needs of the country’s two million Muslims. In accordance with Shariah law, the product will not charge interest. The bank is using the Islamic ‘Murabaha’ structure.

This means the bank will purchase the property from the vendor and immediately sell it to the customer. The price paid by the customer to the bank is repaid over a deferred period, and will consist of the price paid by the bank (less any customer deposit), and an element of profit for allowing repayment over a period of time. It has also been sanctioned by an internationally renowned and independent board of Islamic scholars.

NatWest has over 40 relationship managers across the country who are specially trained to meet the needs of the Islamic community, as well as a number of specialist banking teams to meet their needs, at the following locations: Bradford, Newcastle, London and Birmingham. The product is the first Shariah compliant facility that NatWest Business Banking has launched.

Chief executive officer of NatWest’s Business Banking team, Paul Lynam said: “We are committed to meeting the business needs of all customers. By introducing a Shariah compliant commercial mortgage, we are demonstrating our commitment to this growing community, and the broadening of our focus on this market.”

Source: M.E.N Media

With the guidance of a Shariah Supervisory Board, The Royal Bank of Scotland has created a specialist product – ABT Finance, which allows companies to purchase commercial property with non-interest bearing finance.

The UK’s sole Sharia Law-compliant bank has seen a huge surge of customers during the credit crunch, as its strict religious principles have made it a ’safe haven’. The Islamic Bank of Britain says it has seen a significant growth in non-Muslim customers taking out accounts since the financial crisis took grip of Britain.

Under the strict rules of Sharia Law, the charging or paying of interest is prohibited, leaving many Islamic banks unscathed by the credit crisis – and nervy customers flocking to put their savings in safer hands.

Islamic Bank of Britain head of marketing Steven Amos said: ‘Our core business will always be Muslims but the numbers of non-Muslims are really picking up. ‘We’ve had massive interest and it’s down to the number of reasons why we’re insulated from the credit crunch.

‘There were two reasons for the crunch – the first is liquidity, with banks lending to each other on the money markets – but Islamic banks do not borrow or lend on money markets because interest is not allowed. ‘The second reason Islamic banks are insulated is to do with assets – everything has to involve an underlying asset or service and if you are going to trade in an asset you have to own it first.

‘The explosion in complex derivative products over the last few years has left Western banks reeling from exposure to toxic assets often far-removed from their everyday activities. ‘In contrast the more risk-averse Islamic finance system did not embrace this kind of deal. ‘Conventional banks didn’t know what they were buying in these derivatives but we have no exposure to subprime as we just don’t deal in it full stop.

‘We guarantee you we won’t invest customers’ funds in alcohol, tobacco, pornography or in any form of gambling.’

The Islamic Bank of Britain is the UK’s only stand-alone fully Sharia-compliant retail bank. In July 2008 the bank launched its Home Purchase Plan, billed as ‘the mortgage alternative’, which enables customers to purchase their homes in an ethical and Sharia-compliant manner. The plan is based on the Islamic financing principles of Ijara, which means leasing, and Diminishing Musharaka – partnership. The bank contributes 80 per cent of the purchase price and the customer puts in 20 per cent. Over a period of up to 30 years, the customer will make monthly instalments buying back the bank’s share of the home and with each instalment paid the bank’s share decreases.

Many of the big conventional UK banks have entered into the Islamic finance market in recent years, with big names such as Lloyds TSB offering a Shariah-compliant home finance product.

Source: Daily Mail (UK), 06th October 2008

The Guardian newspaper in the UK describes in detail the different types of Shari’ah-compliant home financing available in the country. There were a few very interesting facts presented. First, a small minority of customers using the Shari’ah-compliant home financing are non-Muslims; currently about 2 percent of the Islamic Bank of Britain’s customers are non-Muslims who turn to Islamic home finance for ethical reasons. Second, and this may provide a way for Islamic banks to broaden their interest beyond the Muslim market, is that in some cases, Islamic home finance is cheaper than traditional mortgages.

“If you bought a property for £250,000 using a diminishing Musharaka plan from HSBC Amanah, you would pay around £1,553 a month (made up of £1,246 in rent and £307 in contribution payments to increase your share), based on the bank buying 90 per cent and you putting down a 10 per cent deposit. If you took out a conventional two-year fixed-rate loan with HSBC (at 6.29 per cent and with a £799 fee) on £250,000, you’d pay around £1,655 a month over 25 years.”

There are of course differences in availability and structure that could negate the difference, the development of cost competitive Islamic home financing is a good thing for the industry as it seeks to expand beyond its current niche role.

Source: ihiBlog

Sharia-compliant mortgages are here – and they’re not just for Muslims

Huma Qureshi explains the ins and outs of the Islamic home loan market

Imagine a mortgage lender who allows you to take all the increase in the price of your home when you sell, but is prepared to share any loss if the property has fallen in value. Such a deal may seem too good to be true in the current property market, but it is exactly what a handful of banks specialising in Islamic home loans are offering.

Islamic mortgages have been in the mainstream market in the UK for some years but it can often be difficult to get to grips with sharia-compliant financial products, which can seem confusing. In Islam, making money from money by charging interest is deemed unfair and is not permitted. So where do you start when choosing an Islamic mortgage?

There are three models of Home Purchase Plans (HPPs): Ijara, which means ‘lease’ in Arabic; Musharaka, which means ‘partnership’; and Murabaha, meaning ‘profit’. Depending on the model, the lender will levy rent or add profit to the amount you pay back instead of charging interest.

Read: Guardian.co.uk

With potentials preceding other European rivals and friendly government policies, the British capital of London is positioning itself as a premier international hub for the booming Islamic finance industry. “If you want to talk to anyone about Islamic finance, and you’re not in the Middle East or Far East, you come to London,” Humphrey Percy, head of Bank of London and the Middle East, told the Financial Times.

Over the past few years, London has established a hub status in the field of Islamic finance. An increasing number of London banks are now offering Islamic banking services to borrowers and savers. There are four licensed wholesale Islamic banks – the only ones in the European Union.

Read: IslamOnline.net

The ICMA Centre has launched a new MSc in Investment Banking and Islamic Finance. This degree is a first in the UK and is taught jointly with INCEIF (International Centre for Education is Islamic Finance) in Kuala Lumpur. The degree aims to respond to the growing interest in Islamic Finance, and also the increase in Islamic Banking services, Islamic Investment and other financial services that are based on Islamic principles.

The full-time (12 months) MSc is the first in the UK to use Islamic material taught by Islamic specialists and aims to capture the increasing demand for the subject with an academic base and practical orientated views on issues such as Islamic Finance, Economics and Law. Students will benefit from having the opportunity to spend three months studying in Kuala Lumpur and study alongside Islamic Finance professionals. The MSc will not require any previous knowledge of Islamic Law or concepts but will explain the current issues within their overall Islamic economic and legal context.

INCEIF – The Global University in Islamic Finance was established in 2006, with significant funding and support from a number of key Islamic agencies and the Bank Negara (Malaysian Central Bank). Agil Natt, President & Chief Executive Officer of INCEIF said “Our unique mission is to elevate and advance the practice of Islamic finance globally. We aim to do this by being the knowledge leader in Islamic finance not only from the religious aspect but also from the ethical perspective to everyone, from KL to Dubai, Tokyo, London and the rest of the world, irrespective of faith and creed.”

Gulf Finance House (GFH) has launched of Gulf Atlantic Real Estate II (GARE II), a Shari’ah compliant UK commercial property fund. GFH said the fund will build upon the success of its first UK property fund, Gulf Atlantic Real Estate (GARE) which it exited in 2005, having delivered excellent income and total returns for investors.

GFH said the fund will be targeting standing properties and no speculative development is envisaged. Properties will be well located, income producing and let to good quality tenants.

Nick Judd, head of real estate fund management at GFH and fund manager of GARE II, said, “Twelve months ago, indiscriminate, highly geared buyers had driven prices far beyond any measure of fair value. Today, with UK commercial property values having fallen so dramatically, we have the opportunity to buy income producing properties at prices well below their recent peaks. UK commercial property is the market of choice for many international investors who regard it as relatively low risk, transparent and liquid compared to many other markets.”

Read: CPI Financial

Prudential is looking at ways of expanding the group’s range of takaful products – which are compliant with sharia law – building on its experience in Indonesia, where 25% of all sales are sharia-compliant products. Half these takaful sales are to non-Muslims, consumers being attracted to the simplicity of the products and their ethical stance to investment.

The profits of the Pru’s Asian operations broke through £1bn for the first time in 2007, matching the profits achieved by the insurer’s traditional UK operations.
Read: Guardian.co.uk

Islamic Bank of Britain (IBB) has announced details of its new treasury deposit account which is targeted at individuals, businesses and charities. The IBB Wakala Treasury Deposit Account gives the competitive profit from the investments with minimum risk for the depositor.

The IBB Wakala Treasury Deposit Account can be opened in sterling, US dollars or euros, and the minimum deposit requirement is £50,000, or the equivalent in US dollars or euros. Read: CPI Financial

“Ethical finance”

The modern notion of “Islamic finance” is only about four decades old but the concerns it speaks to are far older. Most Islamic scholars agree that their religion prohibits charging interest, gambling and taking excessive risk. This means that some Muslims have religious objections to conventional financial institutions and products. Some also want to ensure their savings or pensions are not invested in industries that go against their religion, from alcohol production to gambling – not dissimilar to the wider idea of “ethical finance”. In the absence of alternatives, some will simply use conventional banks, but others feel excluded from the financial system.

As a result, starting in the Middle East, Malaysia and Pakistan, banks have tried to develop “sharia-compliant” services that do not break Islamic rules. These may be as simple as an investment fund that blacklists certain industries.

Or it could be a savings account that does not pay interest but which gives the depositor a share of the bank’s profits at the end of the year. Instead of giving a loan to a small business, an Islamic bank might buy some of the machinery the company needs and then rent it to them at a profit. Alternatively the bank could invest in the firm in return for a share of its profits, rather than a fixed interest payment.

Islamic mortgages and finances

In the past few years Islamic scholars, often working with Western banks and law firms, have sought to devise a vast range of more complicated solutions. They have even looking at controversial areas like hedge funds and futures markets, which many Muslims are sceptical about. In the last five years, the UK government has been encouraging the development of financial services deemed to comply with Sharia law, from mortgages to child trust funds.

Tax laws have been changed to help this niche market

For instance the 2003 budget ended the problem of Islamic mortgages incurring stamp duty twice over. This occurred because in a typical ijara mortgage, the bank buys the house from the seller, and the buyer eventually buys it from the bank.

London leads the way

The finance business is centred in London, home to a large Muslim population. The Islamic Bank of Britain says three-quarters of its business is done in London. But the City of London has its eye on the much more lucrative market of serving large business clients, many based in the Middle East.

Of the UK’s six fully Islamic financial institutions – “the only stand-alone Islamic providers in Europe” – according to Treasury Secretary Kitty Ussher, most focus on the corporate market, with only one actually providing consumers with current accounts. Islamic financial services for UK consumers have been growing fast, but the market remains small. The Islamic mortgage market is worth about £0.5bn, according to the Treasury. This is a tiny fraction of the billions of pounds worth of mortgages issued by UK banks every month. It is also less than a tenth of the value of the Islamic sukuk – securities that loosely equate to bonds – currently listed on the London Stock Exchange (LSE)…

Source: Jane Kinninmont, The Politics Show London, BBC One

Economic Secretary Kitty Ussher

Britain’s treasury announced Monday June 2, 2008 that it favoured wading into the world of Islamic finance, saying it wanted to eventually raise some 2 billion pounds (US$4 million; €2.6 million) through Shariah-compliant bonds. But it warned that some obstacles would still have to be overcome before the government made a final decision on the matter.

The British government has been looking for ways to tap into the market for Islamic finance, whose rapid expansion has been driven by soaring energy revenues in the Persian Gulf and Muslims’ preference for the growing range investment products allowed under the Shariah, an Islamic code of law drawn from the Quran and other sources.

London — already home to the largest Islamic finance market in the Western world — is particularly interested in consolidating its head-start in the area.

Economic Secretary Kitty Ussher said the British Treasury was leaning toward the idea of issuing sukuk, or Islamic bonds, through the government’s conventional bill program.

Normal bonds pay interest and are therefore forbidden by Shariah, which condemns usury. But sukuk work like investment certificates, giving buyers a proportional share of an underlying physical asset, such as leased land, as well as the income that it generates. The process is normally blessed by a board of religious scholars affiliated with a bank.

Ussher said that the sukuk would be fully integrated into the Treasury’s bill program, which issues interest-bearing bills at one, three and six month maturities, and could raise 2 billion pounds (US$4 million; €2.6 million) “over time.” But she added that “outstanding issues” to the issuance of sukuk were still to be resolved. She did not elaborate, saying a government strategy paper on Islamic finance would be published within the next year.

The International Herald Tribune – June 3, 2008

The financial needs of Britain’s 1.6m Muslims have been given a boost after the Government announced that it is looking to launch Islamic-compliant bonds or “sukuk”.

Many Islamic financial products already exist, including Islamic bank accounts, mortgages and Child Trust Funds (CTFs).

Banks like Lloyds TSB or IBB (Islamic Bank of Britain) do offer Islamic mortgages known as Islamic Home Finance. But instead of lending money for a property, the bank buys the home on behalf of the customer, contributing up to 90 per cent of the purchase price. The customer provides the remaining percentage upfront and then pays the outstanding sum over an agreed term, together with a rental payment.

Child Trust Funds (CTFs) are available to all children born on or after September 1, 2002. Parents of these children are given £250 in vouchers to open accounts, although those from less well-off homes receive £500. A second payment of £250 or £500 is sent out when children reach the age of seven, and Gordon Brown has raised the prospect of a third payment during secondary school years. Parents, grandparents, relatives and friends can then top up the government vouchers with up to £1,200 per child per year. To cater to the Muslim market, The Children’s Mutual offers the the Shariah Baby Bond as a stakeholder CTF, with charges capped at 1.5 per cent a year. This ethical fund invests in the shares of companies around the world that are not involved in activities banned under Shariah law. The CTF allows families to start saving for their children’s futures in a way they prefer.

Sukuk, which are often referred to as Islamic bonds, make similar types of payments to investors as conventional bonds but the payments are not interest-based. The precise way a sukuk works depends on the type of contract used, but one common way is to use a lease – or Ijara – contract. In this instance, the money from investors is used to buy an asset, which must be compatible with Shariah law. Once the asset is purchased, it can be leased to generate a rental income, which is paid to investors. At the maturity of the sukuk, the underlying assets are sold, allowing investors to get back their original investment.

Read the full article : Telegraph.co.uk

The Dutch central bank (De Nederlandsche Bank) foresaw last year that the demand for Islamic products will increase in the Netherlands, due to an increase in population and a higher education and income level of Dutch Muslims. Anticipating possible developments in the Netherlands, the Dutch central bank and the AFM have carried out a joint study.

The strong rise of Islamic financial products and services in the UK

Within a few years a broad range of financial products and services has been introduced for the professional and private market. The UK has adapted legislation to create a level playing field with conventional financial products and services and from a consumer protection perspective.

Niche market

The offer of Islamic financial products and services has surged worldwide. In the UK the niche market for Islamic financial products and services is considered important for the position of London as a global financial centre.

In other European countries a centre of activities is yet to form and the range of products is largely limited to the professional market and wealthy individuals. In the Netherlands the market is also in development. The first retail investment products have been launched and various financial institutions have shown interest in the retail market.

The Dutch report aims to improve knowledge of the Islamic finance sector and investigates whether the existing regulatory framework is fit for purpose. With respect to improved knowledge, the study concludes that suppliers, consultants and consumers have only limited knowledge of Islamic finance at the moment. The report warns that this poses a potentially heightened risk of miss-selling of financial products and services, which in turn may lead to reputational damage and legal action.

Regulatory framework

Islamic financial products meet the same economic needs as conventional ones, but generally have a different format. There are many different Islamic types of contract for these products, which are moreover often of a complex legal nature. This brings with it specific risks, which require all parties to have ample understanding of the matters at hand.

With respect to the adequacy of the regulatory framework the study concludes that the most frequently used types of contract – for Islamic mortgages – are outside the regulator’s peripheral vision. This is caused by the limited scope of the definition of credit in the Dutch law on financial market regulation. The criteria for a duty of care, however, are open to a much wider definition in this legislation.

As a result, the report concludes that they can probably also be applied to Islamic financial products and services. A similar problem arises in respect of other regulatory aspects. Not every Islamic financing contract qualifies as a loan.

Little transparency

The report notes that there is at present little transparency in respect of the compulsory alms (“zakat”) and halal elements of Islamic finance products such as Takaful (Islamic insurance), muamalat (Islamic banking transactions) and Sukuk (Islamic securities).

The regulatory emphasis is on the co-mingling of funds, the checks and balances in the verification of financial products by Sharia (“Shari’ah”) scholars and compliance with Sharia law in general. There are also marked differences with conventional banks when it comes to the specific risk profile of Islamic banks. The credit, operational, liquidity and financial risk profile differ. In addition, displaced commercial risk is a typical element in Islamic banking. By contrast, Islamic banks do not carry interest liabilities, which limits the risk in comparison with conventional banks.

As a result, not every institution qualifies as a ‘ bank’ under the terms of the law and, therefore, does not qualify for a banking license. When an institution does fall under the legal definition of a ‘bank’, however, the report concludes that the existing regulatory framework of Basel II offers sufficient flexibility to address issues in respect of corporate governance and liquidity.

Definitions may need to be reconsidered

To what extent legislation may need to be adapted in future depends in part on the range of products and associated types of contract that may appear on the market, according to the report. In particular, the report notes that definitions of common terminology such as “interest” may need to be reconsidered.

The study suggests that financial service providers may need to be better educated on Islamic finance products and services in order to achieve the objective of a true level playing field with conventional financial products and services in respect of legal consumer protection.

The analysis is currently only available in Dutch, although an English translation will be made available by the Dutch central bank in due course.

Source : Written by Adrie van der Luijt, Director of Finance Online(UK) 22 May 2008
Syndication : RIBH

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Dr Humayon Dar is a member of the Islamic sharia supervisory board at BMB Islamic. He has also helped the Cass Business School, at London’s City University, to offer an Executive MBA in Islamic Finance.

He is not a classically trained scholar, who has undergone years of training and studying of Islamic sciences, such as Quranic hermaneutics, but describes himself as a sharia technician or Islamic economist.

“There is a new breed of scholars, who are not traditional, but have a great understanding of finance as well as Islamic law and conventional economics.

“There are about 260 classically trained scholars worldwide who advise on sharia and about 20 of these are renowned, they have a great reputation. I call them tier one sharia scholars. They have a lot of power.”

One scholar was so well known that his criticism of sukuk, an Islamic bond, sent shockwaves through the financial world, with some commentators suggesting that sharia finance was doomed.

Mufti Muhammad Taqi Usmani sits on the board of the Bahrain-based Accounting and Auditing Organization for Islamic Financial Institutions, a body charged with setting sharia standards and institutions. Another figurehead in this influential organisation is Sheikh Nizam Yaquby.

Dar said: “He is the most glamorous scholar of Islamic finance. He is very popular and has a refined sense of humour. He sits on the most number of sharia boards and advises around 60 organisations. These guys have great integrity. They issue fatwas on real sharia. They are not in it for money, money is not a consideration for these scholars.”

Riazat Butt, Guardian.co.uk 12/03/2008