Islamic finance in the UK Presented by: Keith Leach Head of alburaq ABC International Bank plc

Presentation Summary Introduction The Government’s approach Consumer banking products Takafol Commercial property finance The future

Introduction ABC International Bank plc, London –Subsidiary of the Arab Banking Corporation, Bahrain Islamic Asset Management Team, London alburaq Real estate finance and investment Leasing Structured finance ABC Group includes ABC Islamic Bank, Bahrain

Introduction alburaq –Specialises in Islamic retail products in the UK Home finance –Buy-to-let, –Non-UK residents –Self-cert, fixed and variable prices Commercial property finance Savings account (new) –Products available directly or through Lloyds/TSB, Islamic Bank of Britain, IFA market

Islamic finance in the UK Strongly supported by the Government –To help the UK’s Muslim community An ‘inclusive’ approach to help ensure that the Muslim community (and all ethnic/other minorities) do not suffer financial exclusion due to religious beliefs or for other cultural reasons –To promote ‘UK plc’ as a centre for Islamic finance See London as a global hub for Islamic finance, certainly in the West

Islamic finance in the UK Islamic finance experts group –Hosted by the Treasury and meets times a year, chaired by Economics minister (Ed Balls and now Kitty Ussher) UK trade and investment (UKTI) –Supports UK business helping them trade internationally and encourages domestic investment

Government support - action 1997Labour Government in power 1999Sir Eddie George - Working Group 2003Finance Act – Stamp Duty 2005Islamic Bank of Britain authorised 2007Treasury – IF Experts Group 2007FSA regulation of HPP’s 2007Review for UK Gov Sukuk issuance 2008Gov Sukuk announcement

Islamic banks and windows Albaraka (mortgages)1980s United Bank of Kuwait (AUB) (mortgages)1996 HSBC (mortgage, current a/c)2003 ABC International Bank (alburaq (mortgage)2004 Islamic Bank of Britain (retail banking)2004 Ansar Finance (community focused NFP)2004 RBS/Bank of Ireland (Commercial property)2004 EIIB (Investment Bank)2005 Lloyds TSB (current a/c)2005 Children’s Mutual (Child Trust Fund)2005 United National Bank (mortgages, Scotland)2005 BLME2007 EFH2008 Gatehouse plc2008 British Islamic Insurance Co (Takafol)2008

UK authorised Islamic financial institutions Islamic Bank of Britain European Islamic Investment Bank Bank of London and the Middle East European Finance House Gatehouse plc British Islamic Insurance Holdings

Muslims in the UK Increasing population now approaching 2 million Ethnic origins –43% Pakistani –17% Bangladeshi –9% Indian –31% others »Census % live in London and the South-East

Muslims in the UK Comparatively young population –Average age 28 –9 in 10 under 65 –34% under 16 years of age Most interested –2 nd Generation –Born in the UK –Professional careers –Both male and female

Muslims in the UK 411,000 households (Census 2001) 183,386 in rented accommodation »73,034 Council »41,329 other »69,023 privately rented 211,591 home owners »74,891 outright »133,912 mortgage »2,788 shared ownership 16,438 living rent free

Muslims in the UK Only Shariah Products Prefer Shariah Products Cheapest Most Convenient Products

Government Support Regulation and Tax –Legislation to allow Islamic products to compete on a level playing field –FA 2003, 2004, 2005, 2006, 2007 –Alternative finance return and profit share return economically equivalent to interest –Regulation of Islamic home finance (HPPs)

HPP Regulation 2007 Effective 6 th April 2007 Home Purchase Plans Sympathetic disclosure documents IDD, RFS, FIS Few intermediaries authorised Fewer offering an advice service VAT

Residential finance Financing techniques Murabaha Ijara Diminishing Musharaka Commodity Murabaha (Tawarruq)

Savings options (not many) Mudaraba and Wakala accounts –IBB P&L accounts -Commodity Murabaha based –Alburaq Protected Equity Linked Account –Based on Wakala principles pays a return based on the change in value of a basket of Sharaih compliant shares Child Trust Fund Collective Investment Schemes –HSBC and Scottish Widows Global Islamic Equity Funds

Takafol British Islamic Insurance Holdings –FSA authorised April 08 –Products to be launched end of the 2 nd qtr First products –Car Insurance –Property insurance HSBC Amanah –Takafol property insurance

Commercial Property Finance Market –UK residents for business purposes –UK residents for investment purposes –Non-UK resident investors –Corporate or individual purchasers Estimated 100,000 Muslim owned SMEs in the UK

Financing Models Murabaha Ijara Commodity Muarabaha (Tawarruq) Diminishing Musharaka Parallel Istisna (development finance)

Government Support 2006 –SDLT relief extended to corporate entities 2007 –HMRC guidance on tax treatment of all financing techniques covering »Capital allowances »VAT »CGT

Issues for financiers Property usage screening Must be permissible activities Potential contamination liabilities Contaminated land Asbestos Other 3 rd party liabilities as owners Personal injury Negligence VAT Payable on purchase price Payable on rental payments FRI leases Owner’s obligation to insure Owner’s obligation to maintain

Future Ongoing tweaking of laws and regulations UK Government Sukuk Islamic funding for Government PFI projects Securitisation of UK Islamic mortgage portfolios More Islamic finance companies in London

Islamic Finance in the UK Presented by: Keith Leach Head of alburaq ABC International Bank plc 23 rd October 2007