1. Islamic Banking in the UK
Professor Rodney Wilson,
Durham University
Institute for Middle Eastern and Islamic Studies
Federation of Bosnia and Herzegovina,
Islamic Banking and Finance Lecture
Sarajevo, 8th May 2006

2. Contents Sharia compliant liquidity management
The Al Baraka International Bank,
The United Bank of Kuwait/Al Ahli United Bank
The Islamic Bank of Britain
HSBC Amanah
Lloyds TSB Islamic
Islamic home finance costs compared
Regulatory issues
Legal issues
Future for Islamic finance in the UK

3. Sharia compliant liquidity management
Excess liquidity of Gulf Islamic banks
Unable to hold treasury bills
No inter-bank market in Islamic securities
Murabahah overnight deposits in London
Saudi International Bank
United Bank of Kuwait
Significance of London Metal Exchange
Learning experience
Institute of Islamic Banking and Insurance

4. The Al Baraka International Bank, 1982-93
Initiative by Sheikh Salel Kamel of Jeddah
Purchase of Hargrave Securities in 1982
Licensed deposit taking via current accounts
Two branches in London and one in Birmingham
Deposits exceeded £154 million by 1991, mostly through mudarabah investment accounts
Housing finance
10-20 year Islamic mortgages
Monthly or quarterly repayments on fixed basis
Murabahah structure

5. The United Bank of Kuwait/ Al Ahli United Bank
Islamic Investment Banking Unit
Founded 1995
Semi-autonomous operation from Baker Street
16 staff in asset and leasing management
Manzil home ownership scheme
Murabahah based mortgages from 1997
Ijara based mortgages from 1999
Around 2 per week approved by late 1990s
Now distributed through West Bromwich mortgages

6. The Islamic Bank of Britain
Innovative appeal
First branch opened September 2004 in Edgeware Road
Operational headquarters in Birmingham with branches Leicester and Manchester
Opening generated much favourable media comment and free publicity
Potential market
UK has 1.8 million Muslim residents plus many visitors
Many Muslims in professional occupations with good salaries
Stress on Islamic values
Faith and trust
Also aims at value and convenience

7. Islamic Bank of Britain accounts
Current account
No interest payments or receipts
Chequebook and multi-functional bank card provided
Savings account
Operates on mudarabah basis with £1 minimum balance
Profits calculated monthly: 3% since October 2004
Term deposit savings account
Minimum deposit £5,000
One, three or six months earns 3.25%, 3.50% & 3.75%
Treasury deposit
Minimum £100,000 for 1, 3 or 6 months
Murabahah operation with funds invested on in London Metal Exchange

8. Islamic Bank of Britain finance
Personal finance
£1,000 to £20,000 for 12 to 36 months
Operates through tawarruq with bank buying shariah compliant commodities that are sold to client on a cost plus profit basis
Client’s agent sells commodities and proceeds credited to client’s account
Client repays bank through deferred payments
Secured funding
Car finance
Home finance coming soon

9. Critique of Islamic Bank of Britain
Clear mission
Vision and values well expressed
Stress on positive and not simply prohibitions
Publicity material
All in English, but some clients may prefer Urdu or Arabic
Limited product range
Primarily a savings institution that cannot meet all customer need
Tawarruq difficult to market in UK as client scepticism
At fringe of market
Very small bank competing with conventional banks offering Islamic windows such as HSBC Amanah and Lloyds TSB

10. HSBC Amanah Dedicated Islamic finance subsidiary Amanah Home Finance
Established 1998 in London, but headquartered in Dubai
Global network with focus on UAE, UK, US and Malaysia
Amanah Home Finance
Launched in 2004 following abolition of double stamp duty
Islamic current account
£1,000 minimum balance
No interest payments or charges
Multi-functional cards, standing orders and direct debits
Islamic pensions
Investment screening

11. Lloyds TSB Islamic current accounts Islamic home finance
No minimum deposit
Multi-functional cards, standing orders and direct debits
Islamic home finance
Diminishing musharakah structure
Rental calculated as LIBOR plus 1.09%
Compares with HSBC Amanah rate of 5.99%

12. Costs of Islamic home finance, £
Mortgage provider
Conventional
Islamic
Buildings insurance
HSBC Amanah
849
857 34
Lloyds TSB
781
883 21
Note: Monthly payments for a loan of £135,000 over 25 years

13. Regulatory issues Financial Services Authority
Stability of banking system
Promoting public financial awareness
Consumer protection
Combating financial crime including money laundering
FSA Islamic Finance Concerns
Capital adequacy, liquidity, reputation of directors and management
Insistence on shariah endorsement for designated Islamic financial products
Deposit protection provided problems
Participates as observer on IFSB and IOSCO taskforce on Islamic finance

14. Legal issues Flexibility of English law Position of English courts
Advantages for Islamic financial contracts over civil law
No separate Islamic banking law required in the UK
Position of English courts
Shamil Bank of Bahrain versus Beximco Pharmaceuticals of Bangladesh
Failure of the latter to make a payment under a murabahah agreement
Judgement of the High Court and the Court of Appeal

15. Future for Islamic finance in the UK
Competition
A few dominant players in Islamic home finance market
New product development
Takaful Islamic insurance
Shariah compliant pension schemes
Shariah compliant open and closed end funds
Scope for Islamic private equity, real estate investment trusts (REITS) and possibly hedge funds