LONDON, 7 May 2007 — The total volume of Islamic home financing schemes offered by various financial institutions in the UK is set to reach 1 billion sterling pound by 2009, and according to the UK Treasury since 2003, the Islamic mortgage market has grown to over 500 million sterling pound — an increase of about 50 percent in the last year alone.
London-based banks such as Lloyds TSB, Royal Bank of Scotland, Islamic Bank of Britain, ABC International Bank, United National Bank and HSBC Amanah all offer Shariah-compliant products, including the Islamic mortgage.
According to Keith Leach, Head of Alburaq Division at ABC International Bank, a wholly-owned subsidiary of the Bahrain-based Arab Banking Corporation (ABC) Group, the bank has approved over 100 million sterling pound worth of residential mortgage business since its started operations at the end of 2004. ABC expects this business to steadily increase over the next two years.
Alburaq is by far the leading provider of Islamic mortgages in the UK, and the brand will soon be available in the GCC countries as well, under ABC’s expansion strategy for its retail Islamic banking activities.
Alburaq was structured and is marketed by ABC International Bank, while Bristol & West, part of the Bank of Ireland Group, provides all the product support, process expertise and financial resources.
In fact, all the Alburaq range of Islamic mortgages — the basic mortgages, buy-to-let, self-certification, professional, and for overseas investors — is the most differentiated range of Islamic mortgages under one brand and must meet the general criteria of Bristol & West’s range of conventional mortgages plus the recent enhanced criteria, all which are in compliance with Islamic financial principles. UK High Street Bank, Lloyds TSB and Islamic Bank of Britain also distribute Alburaq Islamic mortgages off the shelf.
“We are now seeing the UK market developing very quickly. It is also noticeable that the nature of our enquiries is changing, and less explanation is now required about how these products work. The focus now is more about how much the product costs. At the moment, the volume of Islamic mortgage business is only a small percentage of the total mortgage figure in the UK, but based on our current trends, we are predicting significant growth over the next two years,” Leach said.
The Alburaq mortgage is based on the Diminishing Musharaka (co-ownership plus rental concept) contract, which is the preferred choice for Islamic home financing of most Shariah scholars. Such products recently received a further boost in the UK Budget 2007.
HM Revenue & Customs (HMRC) issued guidance alongside the budget on the treatment of Diminishing Musharaka (co-ownership), a common structure used for Islamic mortgages, and Takaful products, to provide more clarity and encourage growth in these markets. In addition, the Financial Services Authority (FSA) has started to regulate Islamic mortgages, thus giving extra comfort to those interested in Islamic mortgages.
Apart from ABC International, several other banks in the UK offer Islamic mortgages including Lloyds TSB and Islamic Bank of Britain (both offering off-the-shelf Alburaq Diminishing Musharaka products); HSBC Amanah; United National Bank; Royal Bank of Scotland; West Bromwich Building Society; Woolwich Building Society; and Al-Ahli Bank. HSBC Amanah is the only Islamic mortgage provider that currently also offers mortgage Takaful to cover the building, contents and endowment.
However, despite all the pro-activeness of the UK Treasury, the FSA and HMRC in facilitating access to Islamic finance in the UK, there remains the outstanding issue of risk weighting for Islamic mortgages that has been on the agenda for the last five years, with little sign of resolution. Risk weighting is the money that mortgage providers have to set aside to cover their lending. For conventional mortgages this is 50 percent because they are deemed to be an established and therefore less risky financial product in the market. For the newer Islamic mortgages the risk weighting is 100 percent.
As such, they are less competitive because the cost of capital is higher. Most providers pass this cost on to the customers, while one or two are prepared to subside this cost with the aim of establishing a nascent product and gaining a competitive advantage in the market.
If the Labour Government is serious about financial inclusion, then the issue of a level playing field for risk weighting for mortgages should be urgently resolved. Unfortunately, the Treasury, the FSA and HMRC seem to be dragging their feet over this important issue. Failure to do so may give the impression of political posturing.
rather than a genuine attempt at financial inclusion.
ABC International Bank plc also recently launched an Islamic home financing scheme designed specifically for Muslim and other professionals. ABC also plans to launch an Islamic savings products based on equity investments and a commercial property finance product during this year. “We are constantly reviewing our products and striving to offer attractive new options that meet the needs of our Muslim clients, whilst maintaining the strictest level of Shariah compliance. In addition, we would anticipate this offering to have an appeal to non-Muslims as well,” Keith Leach, Head of the Alburaq Division at ABC International Bank, said.
This product, ABC International Bank said, is aimed at doctors, dentists, opticians, pharmacists, vets, teachers, barristers, solicitors, accountants, actuaries, architects and chartered surveyors. Under the scheme, customers can get finance of up to 90 percent of the value of the property, and the payments will be discounted for three years, which makes the rental rate payable under the current pricing equivalent to 5.99 per cent per annum.
The income multiples for the mortgage aimed at professionals are five times the income for an individual application; and 4.5 times the combined income for applications made in joint names. The financing ceiling is set at 400,000 sterling pound along with free valuation of the property, and a refund of solicitors and arrangement fees on completion.
