UK: Crossing over to Islamic banking

As the credit crunch has mutated inexorably into a recession, with bankers having eclipsed politicians, lawyers and even journalists as public enemy number one, the growing number of Islamic finance institutions in Britain might just be sitting pretty.

The UK now has five fully Sharia-compliant banks and another 17 financial institutions have set up special branches or firms. They include the Qatar Islamic Bank (QIB), with its London-based European Finance House in Berkeley Square, and the Islamic Bank of Britain, which has headquarters in Birmingham.

Both have answered Gordon Brown’s call of two years ago for Britain to become the global centre for international Islamic banking; a report by the International Financial Services London even says that Britain’s Islamic banking sector is now bigger than that of Pakistan.

Islamic banks, says Steven Amos, the Islamic Bank of Britain’s head of marketing, are prospering. “Our core business will always be Muslims but the numbers of non-Muslims are really picking up. We’ve had massive interest — and that’s down to a number of reasons, all of which have kept us insulated from the credit crunch.”

He alludes to the nuances of Islamic banking — specifically that Islamic finance has to be Sharia, or Islamic law, compliant. Sharia is taken from the Koran, one of whose central tenets — that money has no intrinsic value — might sound alien to the denizens of the City.

One British businessman believes that adopting Sharia principles might be just what the West needs.Roger Smee, a former professional footballer and now businessman, says the West has “lost the plot. All we have as a success guide is a number of rich lists. Instead of looking down on what we are quick to reject as cumbersome legal restrictions, we should take a page out of the Middle East’s book and use the principles of Sharia to begin building real and sustainable economies.”

Smee, who divides his time between the US, Europe and the Middle East on his real estate and office interiors business, realised six years ago that a financial time bomb was ticking. I was offered a controlling stake in a new US mortgage business. The company was involved in the refinancing of huge numbers of house mortgages, lending at 125 per cent of an already overinflated property value to people who obviously did not have the funds to maintain payments. As we now know, these loans were then packaged up and sold on, earning the mortgage business a 7 per cent fee on each transaction. But the underlying finances were totally flawed.”

Smee’s disenchantment with “watching the world of Western finance become a casino” led him to concentrate many of his activities in Doha, Qatar. There he found Sharia principles to be “based on a deep sense of partnership, with your bank or other investors”.

Two factors help to explain his enthusiasm. Under Sharia, the charging or paying of interest is prohibited, something that, he says, has left the Islamic banks and their customers largely unscathed by the credit crisis. “Islamic banks do not borrow or lend on money markets, so they are not experiencing any of the same liquidity problems besetting UK banks.”

Sharia also only allows investment or trade in a tangible, visible asset. Hamid Yunis, the head of the law firm Taylor Wessing’s Islamic finance practice, confirms that while Sharia can permit certain futures and options structures, such as the salaam [sale contract with a deferred delivery] and arboun [sale contract with a non refundable deposit], it prohibits convoluted derivative products. “An asset has to be visible. If you can’t see it, it’s unlikely to be Sharia-compliant.”

Neill Gibson, a partner in Trowers & Hamlins who works on many Islamic finance matters, sympathises with Smee’s belief that Sharia principles might have helped to insulate conventional markets from their current turmoil. “Sharia prohibits investment in anything that can be seen as speculative,” he says. “Because interest is also forbidden, clients can’t burden themselves with highly leveraged interest-bearing debt.” However, Sharia-compliant instruments, such as a murabaha [deferred sale financing], operate, in effect, as a loan.

Gibson says that Islamic finance wouldn’t have touched the sub-prime markets “but it won’t have been protected from other badly hit sectors, such as real estate”.

Hamid Yunis says there should be a return to “back to basics” banking across the board, rather than merely among Islamic banks. “Banks are much more risk averse in the current climate,” he says.

Perhaps it is this, as much as Sharia’s theological strictures, which banking needs. Or, as Elliot Caldwell, chief executive of Colliers Capital and an expert in property investment fund management, says: “If it was an unsustainable business in the first place, it doesn’t matter what means — conventional, Islamic or something altogether different — you used to invest. In the current climate, the chances are that you’d still be feeling pretty uncomfortable.”

(Times Online)