Islamic-friendly loans more likely be used to purchase an asset

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