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Tuesday, 27 May 2008

Islamic finance makes its case as the ethical choice - and not just for Muslims

Bankers respond to growing demand for Koran-compliant financial products

By Claire Shoesmith

The growing number of self-employed entrepreneurs amongst Manchester's estimated 40,000 Muslim community is boosting demand for shariah, or Islamic-compliant, finance, according to Bashir Timol, a director at specialist financial advisor 1st Ethical in Bolton.

While traditional bank loans are unacceptable under Islamic law — both the payment and receipt of interest is forbidden, as well as investment in certain industries such as gambling, tobacco or alcohol — Timol said 1st Ethical has started offering specialist shariah business investment plans in response to demand from clients.

Latest accounts, up to November 2006, show turnover of £2m, up nearly 30 per cent on the previous year.

“There is a very high level of entrepreneurship amongst the Muslim community here in Manchester and as a result there is significant demand for finance,” he told Crain's, adding that the group's business angels-type investment, whereby 1st Ethical provides money for start-up businesses in return for a stake in the individual operation rather than providing an interest-bearing loan, is proving very popular.


Certain Islamic-compliant products, such as current accounts which offer no credit interest and no overdraft facility, and mortgages, whereby the bank buys as much as 90 per cent of the home on behalf of the customer and then rents the property to the customer while he or she pays back the money over an agreed period, have been available in the UK for several years now.

As early as 2003, HSBC entered the Islamic finance arena and since then most of the other high street banks, including Lloyds TSB, have followed suit in a bid to win business from the estimated 1.5m Muslims in the UK — equal to about 3 per cent of the population.

However, things are now starting to change and Timol said that a recognition that many Muslims are actually sitting on quite large amounts of money has led to the development of several new shariah products, including investment funds that put their money into Islamic-compliant companies, ie not involved in alcohol or gambling; current accounts for businesses that pay no interest; and commercial mortgages that operate in the same way as the shariah compliant residential mortgages.

Moreover, 1st Ethical has recently decided to put a greater emphasis on offering Islamic-compliant wealth management and tax advice for the growing number of wealthy Muslims in the city.

“By offering these services we are allowing Muslims to become much more mainstream,” he said. “They are able to do with their money what other wealthy people can do.”

In the same vein, Deloitte has recently set up a 12-strong Islamic Finance Group in Manchester to cater for the increased demand for shariah finance in the corporate arena.

Middle Eastern demand

While the group carries out business all over the world from its Manchester base, Dawood Ahmedji, one of its directors, said the growth in demand is coming mainly from wealthy Middle Eastern investors looking to bring their money into the UK.

“Being able to play in this market is extremely important,” he said. “There is huge growth in the industry emanating from the Middle East and Asia and we want to be part of it.”

While Deloitte has been doing work in this area for a while, the dedicated team, which incorporates audit, tax and corporate finance expertise, was only set up last November to cater for the growth in demand.

According to Ahmedji, in the “pre-credit crunch” environment UK finance deals were done on very thin margins, which were not attractive to Middle Eastern investors, so they stayed away. However, in the current environment where local investors are finding it harder to source funds, the cash-rich Middle Eastern investors are coming into their own.

“The City is making a strong bid in terms of becoming a hub for Islamic finance in the West,” he said. “The aim is to compete against Japan and Singapore.”

As with shariah personal finance, shariah business banking uses the principle of deferred finance whereby a contract is drawn up allowing a customer to purchase goods and pay later without taking out a loan, on which they would usually pay interest.

The customer can pay for the goods immediately, but normally the payment is deferred or paid in instalments. The financier makes a profit through the mark-up on the deferred sale.

In response to this increased demand, several Islamic banks have also moved into the UK, with the Islamic Bank of Britain opening its seventh UK branch on Stockport Road in Manchester in December 2006.

Since then, demand for its services has grown, with a spokesman telling Crain's the bank is not only attracting more and more Muslim professionals, but is also seeing an increase in non-Islamic customers seeking an ethical-type of investment.

“Islamic finance is a growing area across the broad personal finance and business corporate sectors,” said Emile Abu-Shakra, a spokesman for Lloyds TSB, which has been offering Islamic-compliant banking in its 35 Greater Manchester branches since 2005.

(Crain's Manchester Business)

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