“Ethical finance”

The modern notion of “Islamic finance” is only about four decades old but the concerns it speaks to are far older. Most Islamic scholars agree that their religion prohibits charging interest, gambling and taking excessive risk. This means that some Muslims have religious objections to conventional financial institutions and products. Some also want to ensure their savings or pensions are not invested in industries that go against their religion, from alcohol production to gambling – not dissimilar to the wider idea of “ethical finance”. In the absence of alternatives, some will simply use conventional banks, but others feel excluded from the financial system.

As a result, starting in the Middle East, Malaysia and Pakistan, banks have tried to develop “sharia-compliant” services that do not break Islamic rules. These may be as simple as an investment fund that blacklists certain industries.

Or it could be a savings account that does not pay interest but which gives the depositor a share of the bank’s profits at the end of the year. Instead of giving a loan to a small business, an Islamic bank might buy some of the machinery the company needs and then rent it to them at a profit. Alternatively the bank could invest in the firm in return for a share of its profits, rather than a fixed interest payment.

Islamic mortgages and finances

In the past few years Islamic scholars, often working with Western banks and law firms, have sought to devise a vast range of more complicated solutions. They have even looking at controversial areas like hedge funds and futures markets, which many Muslims are sceptical about. In the last five years, the UK government has been encouraging the development of financial services deemed to comply with Sharia law, from mortgages to child trust funds.

Tax laws have been changed to help this niche market

For instance the 2003 budget ended the problem of Islamic mortgages incurring stamp duty twice over. This occurred because in a typical ijara mortgage, the bank buys the house from the seller, and the buyer eventually buys it from the bank.

London leads the way

The finance business is centred in London, home to a large Muslim population. The Islamic Bank of Britain says three-quarters of its business is done in London. But the City of London has its eye on the much more lucrative market of serving large business clients, many based in the Middle East.

Of the UK’s six fully Islamic financial institutions – “the only stand-alone Islamic providers in Europe” – according to Treasury Secretary Kitty Ussher, most focus on the corporate market, with only one actually providing consumers with current accounts. Islamic financial services for UK consumers have been growing fast, but the market remains small. The Islamic mortgage market is worth about £0.5bn, according to the Treasury. This is a tiny fraction of the billions of pounds worth of mortgages issued by UK banks every month. It is also less than a tenth of the value of the Islamic sukuk – securities that loosely equate to bonds – currently listed on the London Stock Exchange (LSE)…

Source: Jane Kinninmont, The Politics Show London, BBC One

http://ribh.wordpress.com/2008/06/03/making-islamic-finance-work-in-london/