The HSBC press officer is strangely unhelpful when I ask if I can interview someone who has availed one of the bank’s new Islamic mortgages.
The officer hesitates and, finally, admits that she can’t help me because takers are “thin on the ground at the moment”. After the fanfare that greeted the mortgages’ launch earlier this summer, I tell her I find this surprising.
“It’s not because there’s not been any interest,” she says defensively. “It’s just that we haven’t been going for that long.”
A call to the bank’s Amanah Finance subsidiary confirms her appraisal. Teething troubles could be one explanation; legal red tape another.
Iqbal Asaria offers an informed view. For, besides occupying the chair of the Muslim Council of Britain’s Business and Economics Committee, he is a member of the working group on Islamic mortgages set up by the Governor of the Bank of England Eddie George.
Asaria, puts the puzzle down to a notoriously unfair British tax – stamp duty – which is imposed on the paper that legal documents are written on.
Changes to the tax system were introduced in the last budget following discussions between the Governor of the Bank of England and the Chancellor, Gordon Brown, but they have been slow to take effect.
“The level of inquiries in Islamic financial products has been quite high,” Asaria says, “but the stamp duty legislation only becomes effective on 1 December. So if you purchase one of these products before then, you are liable to double stamp duty.”
New services seek to appeal to
He pauses before making a prediction. “After 1 December, you will see a more robust take up.”
According to Asaria, Eddie George was instrumental in the Islamic initiative getting off the ground in the first place. “His role was critical,” he says. “He was very sympathetic from the word go and he persuaded the officials and regulators to look at the requests sympathetically.”
Indeed, in a speech to the Council of Mortgage Lenders in March, George claimed, controversially, that financial products like current accounts, investment funds and unit trusts all had characteristics in common with the Quran’s teachings.
“We in the UK have a clear economic interest in trying to ensure that the conditions for a flourishing Islamic financial market are in place in London,” he told the meeting.
The problems have always been about theological compatibility – and financial facts on the ground.
According to the mainstream interpretations of the Quran, transactions involving interest rates are banned. The alternative pioneered by finance houses such as the late al-Baraka Bank, and the United Bank of Kuwait, was for arrangements based on either Murabaha (deferred payment) or Ijarah (leasing).
But critics claim such arrangements are relatively costly and involve a risk displacement scheme almost exactly equivalent to that of an ordinary interest rate. That is, they are not terribly Islamic.
“Superficial realities may be the same but anyone wanting to launch a product in the UK would be mad if it had no equivalence to existing products,” Asaria insists. “Only with time will you get slightly more product differentiation.”
Perhaps, but faced with a choice between the options on the table, Britain’s estimated two million Muslims have, over the years, voted with their cheque books.
A recent study by the Datamonitor group estimated that more than £9 billion ($14 billion) worth of conventional housing mortgages had been taken out by British Muslims.
If a viable Islamic initiative were launched, the group predicted, then in a worst case scenario, gross advances for Islamic home finance in the UK would reach £1.39 billion ($2.17 billion) by the end of 2006.
According to Sir Howard Davies, the chairman of the UK’s Financial Services Authority (FSA), the Islamic banking and finance market is now globally worth between $200 million and $500 million.
This is not the kind of money that Eddie George, or the High Street banks, can afford to ignore.
“Six other institutions are considering issuing similar products, three or four of whom are mainstream High Street banks and building societies.”
According to Asaria, “Six other institutions are considering issuing similar products, three or four of whom are mainstream High Street banks and building societies.”
“The United International Bank has also announced the launch of a product. Al Ahli United bank has been offering it for a long time and the West Bromwich building society is also offering a version.”
Some observers believe that the British banking industry is watching to see the success of the HSBC experiment before committing themselves.
Writing in the Review of Islamic Economics recently, Humayon Dar found that while there was great enthusiasm for banking without interest rates among British Muslims, there was “virtually no demand” for Murabaha-based packages.
Dar blamed “the negative images Murabaha carries in most ordinary Muslim’s minds”.
While more than half of all UK Muslims were born in this country, most have family ties to Pakistan, where Murabaha-based mark-up financing has been banned because of misuse by banks.
It is also relatively costly, when compared to non-Islamic mortgages. As a result, Dar argued that “Islamic finance in the UK has developed into an elitist phenomenon without much grassroots appeal.”
Iqbal Asaria does not agree. “Presently, these are not the cheapest options,” he concedes. “But if you take the top five available products, these will be right in the middle. They are no more or less discriminatory than existing products.”
UK financial institutions are
And what of the future? Sir Howard Davies recently hinted that an application for a fully-fledged Islamic bank was being positively considered by the FSA. It “would be good for Muslim consumers, good for innovation and diversity and good for London,” he said.
Asaria confirms that an application to the FSA is already well-advanced. “The Islamic House of Britain has applied for a full banking licence,” he says. “It would be the first solely Islamic bank in the UK.”
Significantly, he adds. “It will have to compete with the likes of HSBC which has an established branch network across the country, so it’s not going to be easy. But it will be significant because they will offer a whole range of Islamic banking products.”
In his paper, Dar argued that the future for Islamic financing depended on “the development of mortgages for the ordinary Muslims living in the inner city.” This constituency may be relatively poor but they constitute a large – perhaps the largest – slice of the Islamic financing market.
Whether HSBC or for that matter an Islamic House of Britain can address their needs is still an open question.