LONDON, 28 March 2005 — UK chancellor of the exchequer, Gordon Brown, has confirmed that he is introducing further measures to create a level playing field for Islamic financial products in the British market.

The measures, first announced in the budget 2005-2006 recently, passed almost unnoticed. But a few days ago, Brown addressing the Muslim News Awards for Excellence 2005 in London, reiterated that “British Muslims make a huge contribution to this country’s success, to our prosperity, our society and our culture. The government recognizes the distinctive features of the Muslim community. That is why in the Treasury we have reformed stamp duty to facilitate Islamic mortgages. Removing tax disadvantages for Islamic mortgages was the right thing to do for the Muslim community, but was also the right thing to do for our mortgage system as a whole. And in the budget last week, I announced further measures to create a level playing field for other Shariah-compliant products.”

These include creating the same tax treatment and reliefs for Islamic mortgages based on the Ijara (leasing) and Diminishing Musharaka (co-ownership); and taxing profit rates on Islamic savings accounts to bring them in line with taxing the interest on conventional deposit accounts.

The British government in yet another move two weeks ago launched a consultation paper on proposals to help council tenants in the UK wishing to use non-standard mortgage products to purchase their homes but cannot do so under current Right to Buy rules.

Non-standard mortgage products or alternative home financing schemes primarily refer here to Islamic Shariah-compliant mortgages, of which there are currently three types available in the UK market. These include mortgages based on the Murabaha contract (a mark-up); on the Ijara contract; and on the diminishing Musharaka contract.

Housing Minister Yvette Cooper insists that the consultation paper is about giving tenants more choice and falls under the social and financial inclusion policies of the government. “The government,” she maintains, “wants to widen the choice available to tenants who want to buy their own home, whatever their faith. But we also need to make sure that tenants are not exploited by lenders or private companies in the process. That is why we are consulting on these proposals”.

Under the Musharaka mortgage, legal ownership of the property passes from the seller to the lender, who immediately transfers legal ownership to the buyer at a higher price. The buyer repays the higher price over the term of the loan.

Under the Ijara mortgage, legal ownership of the property passes from the seller to the lender, who remains the legal owner of the property until the loan is repaid. While the loan is being repaid, the buyer also pays rent to the lender. Once the loan is fully paid, the lender transfers legal ownership to the buyer.

The diminishing Musharaka mortgage involves joint ownership by the lender and buyer. With each payment by the latter, partial transfer of ownership takes place. As part of the monthly payments, the lender rents the house to the buyer for use of its share over the agreed period while there is shared ownership. Once the buyer has bought the lender’s share of the property by the end of the agreed period, the buyer becomes the sole owner of the property.

Under current Right to Buy rules, tenants cannot use non-standard mortgages such as Islamic mortgages. Many UK Muslim council tenants, for instance, feel they cannot participate in the Right to Buy scheme, simply because the legislation does not consider new financial products, for instance which satisfy Islamic (Shariah) law. Also, the Right to Buy legislation assumes the landlord sells directly to the tenant. It does not allow for transitional ownership by a third party.