LONDON, 14 April 2003 — Amidst the fog of war and concerns over the state of the global economy and its impact on Britain, Bank of England Governor Sir Eddie George addressed a seminar here on “Islamic Home Finance” on March 27 organized by the UK’s Council of Mortgage Lenders.
“The good news,” he explained to delegates, “is that, I think without exception, the reaction of all the different (UK) authorities involved has been generally very positive. They have been willing to listen, to understand the positive purpose of what has been proposed, and they have been constructive in their approach to trying to find solutions. “The Treasury has certainly been actively looking into the question of stamp duty, which is perhaps the most immediate concern in relation to Islamic mortgages, and I am hopeful that a way forward can be found at some point, though I dare not speculate on whether it will be covered by the chancellor’s budget in April.”
Well, Sir Eddie can be a trifle mischievous sometimes. But it would have been unthinkable and unprecedented for a governor of the Bank of England to leak even a single item of a UK budget. The Chancellor of the Exchequer Gordon Brown, in his April 9 budget speech announced that the law for the removal of the double stamp duty for Islamic alternative mortgages will be included in this year’s finance bill. The announcement was truly momentous because never before in British parliamentary history had any provisions relating to Islamic financial management been included in a UK budget, let alone any reference made to Islamic financial products.
The reasons and rationale for this can be found in the sentiments which Sir Eddie alluded to in his speech at the Council of Mortgage Lenders. “I became interested in Islamic finance more than a decade ago when I met a very lovely, deeply religious, Muslim couple who were living in this country with their family, and who had recently bought a house on the back of a conventional mortgage. They told me of their delight in their home, but then they explained to me — not at all in an aggressive way, in fact in sorrow rather than in anger — the regret that they had had to go against their religious principles to finance it. That made a big impression on me. It was clearly troubling their conscience. And that seemed to me particularly sad because it struck me as totally unnecessary. Surely, I thought, our very inventive financial system could find ways of meeting the needs of the different sectors of our society in ways where this kind of problem need not arise.
“When I looked at it a bit more, it seemed to me that in fact many of the financial products commonly used in this country... already had some, at least, of the characteristics consistent with the teachings of the Qur’an; if only we could come to a better and more precise understanding of the Islamic financial products that were being talked about at that time. If only we could encourage the Islamic (financial) community to develop a more consistent, and desirably more standardized specification of the products they wished to introduce, then with a little imagination, we could surely find ways of fitting them into our legal and regulatory framework in this country, on par with our more traditional financial instruments.”
To Sir Eddie there were no reasons why the British legal framework needed to be disturbed or why British economic or social objectives needed to be adversely affected through the introduction of Islamic financial products such as mortgages. “It seemed to me, in that case, that the principle of live and let live should apply in an open and tolerant society. Indeed it seemed to me also that as a matter of general principle, a wider range of financial products would benefit the whole of our community and that Islamic products could prove to be attractive beyond the purely Muslim sector,” explained Sir Eddie.
The Council of Mortgage Lenders, the professional body representing British banks and building societies who offer consumer housing finance, not surprisingly welcomed the Treasury move. The legislative change, stressed the council, will give further impetus to the development of suitable products for Sharia-compliant finance in the UK.
Islamic mortgages rely on the involvement of a financier who buys the property, and then sells it on to the buyer and collects installment payments (similar to traditional mortgage payments) for the repayment of the capital. Instead of charging interest, the financier often sells the property for the same price but then charges additional rent on it for a specified period of time. Stamp duty is therefore charged twice as the ownership of the property transfers twice — once to the financier, and once to the ultimate buyer.
This has necessarily been reflected in the price of the mortgage finance. Re-mortgaging also presents a problem because the old lender has to sell the property to the new lender and thus incur another charge of stamp duty.
Mohammed Paracha, an associate of international law firm Norton Rose, who is a member of the Bank of England Working Party and who has been working with the Inland Revenue to devise reliefs, was also expectant. “Once the Alternative Property Finance Arrangement reliefs come into effect, all customers seeking mortgages in the UK will have access to an alternative way in which they can purchase property. Both Muslims and ethically minded customers may prefer these alternative arrangements over the traditional conventional mortgage as the Islamic mortgage does not involve charging interest.
“This concept may be attractive to customers other than Muslims thereby opening up the potential market even further. With the additional stamp duty burden now set to be removed we can expect some mortgage providers to launch Islamic mortgage products later in 2003.”
The Treasury move above all is a vindication of the Labor government’s social inclusion policy and efforts to mitigate financial exclusion for Britain’s minorities, in this case the two million or so British Muslims.
