Islamic finance

By Sarah Modlock

21 June 2006

Speculation abounds over the £38,000 stashed in the basement of the house belonging to a Muslim family which was raided by police in Forest Gate recently. There is a great deal of interest in the family's explanation for keeping so much cash at home - the laws of Islamic finance.

Put simply, Shariah Islamic law does not allow followers to make money from money. This means they cannot earn interest and so paying money into ordinary banks is not possible, although most banks pay so little interest anyway they may as well be running Islamic accounts.

Muslims must create wealth only through legitimate trade and investment in assets. Money can be used to buy good or services which can then be sold for a profit. Investment can be tricky too - putting cash into companies involved with alcohol, pork products, gambling, tobacco, pornography and anything else deemed unethical or unlawful is strictly prohibited.

Sharing risk and profit

The Islamic financial model works on the basis of risk sharing. The customer and the bank agree terms and divide both the risk and any profits between them. The main categories within Islamic finance are:

•  Ijara - a leasing agreement whereby the bank buys an item on behalf of customer and then leases it to the customer over a specific period.

•  Ijara-wa-iqtina - a similar arrangement, except that the customer is able to buy the item at the end of the contract.

•  Mudaraba - which offers specialist investment by a financial expert where the bank and the customer share any profits. Customers risks losing their money if the investment is unsuccessful, although the bank will not charge a handling fee unless it turns a profit.

•  Murabaha - a form of credit which enables customers to make a purchase without having to take out an interest bearing loan. The bank buys an item and then sells it on to the customer on a deferred basis.

•  Musharaka - a investment partnership in which profit sharing terms are agreed in advance, and losses are pegged to the amount invested.

Rapid growth

Today, more than two hundred and fifty Islamic financial institutions are operating world-wide and Islamic banking is estimated to be managing funds to the tune of £300 billion. Islamic bankers keep pace with sophisticated techniques and latest developments and have evolved investment instruments that are not only profitable but are also ethically motivated. Because of this, Islamic banking continues to grow at a rapid pace and its value-orientated ethos enables it to attract business from Muslims and non-Muslims alike - its clientele are not confined to Muslim countries but are spread over Europe, America and the Far East.

HSBC launched Shariah-compliant mortgages in Britain in 2003. The UK's first Islamic bank - the Islamic Bank of Britain - opened in September 2004 on London's Edgware Road and more branches have appeared around the country since then. It offers the same types of products you would expect to find in any high street bank: Shariah-compliant versions of current accounts, loans, mortgages, credit and charge cards and business banking services.

High street and world stage

But with two million Muslims living in the UK, it was clear that other banks would want a slice of the business. A handful - including some of the biggest international names and the Middle East's biggest traditional banks - also offer financial products in the UK tailored for Muslims. West Bromwich Building Society offers Shariah-compliant mortgages and Children's Mutual provides the UK's only Shariah-compliant Child Trust Fund.

Earlier this month, Lloyds TSB took its Shariah-compliant current accounts and mortgages nationwide across its 2000 branches. Previously, they had limited availability. In common with other banks, the products will of course be available to non-Muslims. The bank says it will expand its product range and planned to launch an Islamic student current account in time for the new academic year.

Speaking at the Islamic Finance and Trade Conference this month Chancellor Gordon Brown called for the UK to become a centre of Islamic finance - 'the gateway for Islamic finance'. Tax reforms are expected to make Shariah-compliance easier. The Chancellor's comments are no surprise given the huge interest in Islamic finance at the recent World Economic Forum in Sharm al-Sheikh in Egypt. One of Germany's biggest banks, Deutsche Bank, announced a joint venture with Ithmaar Bank of Bahrain and Abraaj Capital of Dubai to launch a £1bn Shariah-compliant financial fund. And many bankers at the Forum were upbeat about a growing success story of banking services which they argue are a fairer and more ethical way to handle financial affairs.

And so back to the beginning and the family in Forest Gate. Humeya Kalam, sister of the two men arrested and then released without charge said that hours after her brothers were arrested she told police they would find the money in a suitcase. 'My mother has never felt it right to keep this money in a bank account or to hold savings in a bank,' she said.

In Miss Kalam's situation, she explained the savings were mostly rent money from a family living in a house she owned next door to their home. Her brothers put some of their wages in the case each month and said it was 'neither sinister nor unexplained'. In the wake of so much publicity I am sure they will prefer the safety of an Islamic bank account now.