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 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 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

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

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

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

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

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 Client’s agent sells commodities and proceeds credited to client’s account Client repays bank through deferred payments Secured funding Car finance Home finance coming soon

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

HSBC Amanah Dedicated Islamic finance subsidiary Amanah Home Finance 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

Lloyds TSB Islamic current accounts Islamic home finance 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%

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 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

Legal issues Flexibility of English law Position of English courts 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

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