British Banks Target Muslims

by Sanjay Suri

(IPS) LONDON -- How do you ever engage in banking without interest coming into it? Well, if you want to do it the Islamic way, you just have to find a way.

Small Islamic banks have been offering Islamic alternatives for a while. But over recent months major banks like HSBC and Lloyds have begun to offer new products in Islamic banking to the estimated two-million-strong Muslim community in Britain.

Bank managers are competing to create products around the difficult idea of encouraging profits without allowing interest.

"The principal difference between Islamic banking and conventional banking is that Islamic banking has to be completely according to Sharia law," James Lewis from Lloyd's TSB bank told IPS.

"Sharia law says you are not allowed to give or receive interest," he said. "All conventional banking like current accounts etc. involve the giving or receiving of interest in some form or other. So what we have done with the Islamic financial services product is to take a current account, which is exactly the kind of current account you would enjoy as a normal conventional banking customer, but set it up so that there is no interest given or sought."

But then how does the bank make its money? "What we are looking to do is to get into the market of nearly two million Muslims in the UK. Their needs aren't really being addressed by conventional banking services. We want to reach out to them and give them a proper choice. If we really make a mark with the Muslims in the UK, and get a greater number of Muslim customers than we have at the moment, it gives us an opportunity to build a relationship with customers, and maybe provide other needs they may have in the future."

The other needs include primarily home mortgages. This is the most promising area for Islamic banking, and bankers say they have found a simple way around lending money on interest.

"You as a customer come to me saying I would like to buy a house," says Lewis. "The bank then buys the house in its own name. You then make a monthly payment to the bank. That payment will not include any interest. But what it will basically cover is rental for the bank as if you were living in a property in their name, and then further payment, gradually buying back the title of the property. By the end of the term, the property is yours. But the payment itself doesn't include an interest element."

But could this be conventional banking in a roundabout way, with the interest paid and received, but disguised?

"These products launched on the market have been approved by a board of internationally respected Sharia experts who have issued a fatwa for each of our products that it is fully in accordance with Sharia law," Lewis said.

The products have been supported by some Islamic leaders who have become key consultants to banks for these products.

"I'm surprised by the amount of interest generated," Mufti Barkatulla, senior imam at Finchley mosque in London told IPS. "At least half a dozen banks are competing for the Muslim market, and they are all falling over each other in introducing new products faster than anybody else. I'm serving on at least four different banks to advise them, and then audit their compliance."

Barkatulla insists that the new products are not a form of disguised interest. "Interest is one part of mode of operations, but there are others generating profit when there are exchanges involved, when there are goods and services involved. But if it is a money for money transaction loan, that is forbidden in Islam."

Under Islam, he said, there is a push to moving money to generate profit so that it circulates, rather than sitting somewhere to gain interest." The Islamic mode does not encourage money to sit idle. Invest it for the generation of goods and services. More goods are more beneficial for humanity and for business."

The new push to Islamic banking products follows a directive from the Bank of England (the central bank) to banks to come up with products that are consistent with Islamic beliefs. The Bank of England has also amended earlier practise that made Islamic banking difficult.

Primary among these was the payment of stamp duty on buying a house. A Muslim home owner looking for an Islamic mortgage earlier had to pay stamp duty once when the bank bought the house (in partnership with him) and the second time when he finally bought the house off the bank. Under new orders issued in 2003 stamp duty on a mortgage would have to be paid just once.

Until then only The United Bank of Kuwait offered Islamic mortgages to the London market. But the end of double stamp duty is not necessarily the end of all problems with the new product. Under Sharia (Islamic law) the sources of a bank's money also need to be Sharia compliant.

Theoretically this means that there should have been no interest paid or received to generate the money a bank has to buy a house in partnership with a Muslim owner. Typically a bank would produce 90 percent of the money needed for buying a house.

British banks have been seeking to reassure the Muslim market that the new products have taken such issues into account. "It has taken banks close to two years to come up with workable and competitive products," Kamel Hothi from Lloyds TSB told IPS. But there is no certainty what shape these products will finally take, and how many Muslims will follow this new path to Islamic banking.