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Tuesday, 25 November 2008

One area of the UK’s financial sector has emerged relatively unscathed from the credit crunch – the new Islamic banks

The banking community in the City of London has been hit hard by the economic crisis. But one area of the UK’s financial sector has emerged relatively unscathed from the credit crunch – the new Islamic banks.
These institutions are expanding their balance sheets as demand continues to grow in Europe for financial products that avoid paying interest, in line with strict religious rules. These products instead pay profits from an underlying business or rent from a building used as collateral to raise money.
In contrast to the vast losses – now more than $650bn – at the conventional banks, this expansion rests on a lack of exposure to toxic assets and derivatives, often related to mortgages, that have plunged in value.
Significantly, two of the UK’s five Islamic banks launched this year in the face of the financial crisis. European Finance House opened in January, and Gatehouse Capital followed in April.
A third, Bank of London and the Middle East, launched in July 2007 – a month before the credit squeeze emerged.
The more established of the Islamic banks, European Islamic Investment Bank and Islamic Bank of Britain, are also attracting new customers. IBB, the only retail bank of the five, even launched a sharia-compliant residential mortgage in September, as Lehman Brothers collapsed.
This was a big development for the British market, as it is the first wholly sharia-compliant home loan. Other banks in the UK, such as HSBC and Lloyds TSB, offer Islamic mortgages but these are not considered pure by some Muslims, as these banks use money from conventional business to help provide loans.
In an Islamic mortgage, the customer pays the bank rent rather than interest. The rent is paid over a given period of years, like a conventional mortgage, until an agreed amount has been transferred to the bank. At this point, the tenant becomes the owner.
Sultan Choudhary, commercial director of IBB, says: “We were confident enough to launch the product in spite of the credit problems. We are not insulated from the credit crisis. I don’t think anyone is, but we are not as affected as the other banks because we do not have the exposure in terms of toxic assets. We are also not exposed to wholesale funding, like Northern Rock was. We have assets from shareholders and deposits.”
John Weguelin, chief executive of European Islamic Investment Bank, says: “We are fortunate that many of our clients have not been adversely affected by the credit crisis, although some investors are waiting to see how the markets unfold.”
Humphrey Percy, chief executive of Bank of London and the Middle East, says: “Our balance sheet is still growing as a result of our increasing deposit base and more parties willing to look at Islamic finance as an alter­native way to invest because they see it as competitive as well as ethical.”
London has led the way in developing the sector in the west. The UK is the only country in the European Union that has established Islamic banks.
The British government is also still determined to launch an Islamic bond, or sukuk, although this is one area of sharia-compliant finance that has been hurt by the deepening credit crisis. This is partly because of the slump in the oil price, which has undermined demand from the large pool of investors in the oil-rich Middle East. Institutions in the that region, together with Asia, are the main issuers and buyers of Islamic bonds. Most of the customers and clients of London’s Islamic banks are based in Europe and the UK, which explains why the oil slump has not affected them to such an extent.
Principal Insurance, the UK’s first Islamic insurance company – the first in western Europe – was also launched in May, allowing the UK’s 2m Muslims to insure their car or house in a sharia-compliant way.
However, it is not just Muslims who are looking at using Islamic finance, which has seen its market grow from about $100bn in 2000 to $800bn today.
IBB says many non-Muslims are turning to its products because it has become an increasingly competitive way to raise money.
Ian Yearsley, a retired journalist and lay preacher who lives in south-west London, is one of the bank’s many non-Muslim customers to set up a savings account, which pays on a profitshare rather than interest basis.
“It is an ethical and sensible way to invest my money. It should be remembered that there was a prohibition against usury, or earning interest, among Christians in the Middle Ages,” he says.
The other four banks, all wholesale operations, are also used by a rising number of companies and institutions.
For example, BLME arranged a financing facility for Thamesteel, a Kent-based steel manufacturer, that is part of the Saudi Arabian Al Tuwairqi group. Thamesteel used the money to buy scrap metal.
“We could arrange the financing in an Islamic way at a competitive price,” says Mr Percy.
(Financial Times)

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