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A matter of principles

IFS head of faculty financial regulation Mark Roberts asks how well intermediaries are placed to cater for the needs of Muslim clients

The UK’s Muslim community makes up around 2.7 per cent of the total population, representing about 1.6 million people. Increasingly, Muslims are becoming a more prominent part of our society in the positions they hold and the lives they lead and certainly there are fewer more entrepreneurial communities in the UK. But given the Islamic principles, our much vaunted financial services industry offers them very little.

This is changing and moves have been made, particularly in the mortgage market, but how well positioned are intermediaries to give the kind of advice that Muslim clients need? Under Sharia law, paying or receiving interest is not allowed and two types of mortgage have led the way in circumnavigating this issue.

Initially, Murabaha mortgages were offered in the UK and under this arrangement the bank buys the property and then sells it on to the homeowner. By paying off the total price over a fixed term the sale is completed.

Ijara schemes followed and these arrangements see the bank buy the property and then charge a rent for the individual to live in the property, again over a fixed term. On top of the rental payments made, there is also a consideration to buy the underlying asset and so again, come the end of the term, ownership of the property is achieved. Under Ijara schemes, ownership of the property was not transferred until the final payment has been made.

However, under the Diminishing Musharaka scheme, which works similarly to an Ijara product, ownership of the property is transferred in equilibrium to the monthly payments that are made and so rather than having to wait until the final payment is made, individuals slowly build up their shareholding in the property.

But it is not only in financing the purchase of a property that problems exist. Insuring the payments made and indeed the buildings and contents can also be difficult in relation to the confines of Sharia Law. Making a sale, where the outcome remains uncertain or is not known, is again prohibited and this Gharar or uncertainty means everyday insurance products that are available in the UK do not fit the bill for the Muslim community.

To date, little has been done to crack this conundrum although there are ways around it. One option is to use a form of insurance called Takaful, which operates on a mutual type of basis. The idea is that a group of people all pay into a pot and when an incident occurs that would merit a claim, settlement is made from the centralised fund.

But this furrow has not been ploughed with any real intensity and for lenders in the UK providing Sharia compliant mortgages, they tend to take out their own buildings insurance and then pass the cost of that on to the homeowner in the form of monthly payments.

While there has been a good deal of coverage on mortgages and financial products for the Muslim community, there are only four lenders in the market – HSBC, the Arab Banking Corporation, the Ahli United Bank and the United National Bank, formerly the Pakistan International Bank. Other players in the market act as introducers to these providers but do not underwrite the products themselves.

Doubtless, more providers will enter the market and the suite of products will develop in time. The Islamic mortgage market in the UK is worth over 500m and grew by 50 per cent last year. In comparison, the UK’s mainstream residential market this may not seem very much but certainly there is demand in the market and opportunities for those able to design and market products effectively.

For many intermediaries, there will be few enquiries coming over their desk regarding such products and many may feel that investing time and effort in gearing up to handle such requests will not deliver sufficient returns to make it a viable endeavour. Certainly, the average broker in the UK will have more pressing concerns but those working in areas where there is a vibrant Muslim community or who already have a number of Muslim clients should certainly look at developing their offering.

Client referrals are a very strong feature of the Muslim market and so advisers that can prove themselves capable of providing the services needed to a number of individuals may find themselves developing a specialist line of business very quickly.

To date, training in this area remains limited. Entry level qualifications to the mortgage market do touch upon Islamic mortgages in passing and more advanced qualifications also look at some of the alternative lending schemes in the UK market such as those offered for the Muslim community.

For brokers looking to get into this area, more training may become available in time but at the moment there is little substitute for personal research. Certainly, information is readily available on the products in the market, the way in which they work and proposals for the future while a number of product providers hold seminars on an ad hoc basis.

Intermediaries need to avail themselves of this information if they are going to do offer the service that Muslim clients need while ongoing uncertainties need to be cleared up on wider issues. For example, if a mortgage borrower falls behind on repayments, then, in certain circumstances, there is access to state help to pay the interest on the loan. However, given that there is no interest on a Muslim mortgage, what should the Government provide? Indeed, should the help fall under the guidelines for interest repayments or is it more appropriate that it comes under those in place for individuals struggling to pay their rent?

As with any emerging market, there are hurdles to be overcome and grey areas to be clarified. But there are also opportunities to be had.

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