The big financial institutions are beginning to take note of the underserved British Muslim communities.Lloyds TSB is the second major high-street bank to start selling banking products compatible with Sharia law and has opened two branches outside London in the last few months. The UK’s first Islamic bank, Islamic Bank of Britain, has also promised regional branches after opening a branch on London’s Edgware Road last year. This is proof positive that they believe there is a lucrative niche in designing financial products and services to meet the needs of the UK’s two million Muslims. Unlike other religious groups, Muslims are excluded from mainstream banking products because they are incompat- ible with strict Islamic principles, which forbid earning or paying of interest. HSBC, which has a major banking presence in the Middle East, has pioneered Sharia-compliant products in the UK and last year it added a stakeholder pension product to its mortgage and current account products. The stakeholder range is suitable for individuals and groups. Anyone advising businesses should make their clients aware there is a pension which meets the needs of Muslim. HSBC says pension fund trustees who do not offer a pension fund suitable for Muslim employees might find themselves open to prosecution for religious discrimination after the in- troduction of new anti-dis-crimination legislation in the UK. The sticking point with mainstream investment funds is that, in addition to not being able to earn interest, Muslims cannot benefit from any company involved in pornography, gambling, alcohol, tobacco, pork production or financial services. Banning investment in any company operating in these areas in a world of multinational conglomerates would be virtually impossible so HSBC’s fund has been designed so a proportion of a company’s dividend deemed to be earned from doctrin- ally unacceptable activities within a big company can be donated to charity. Amjid Ali, business development manager for HSBC Islamic banking operation, Amanah Finance, says UK Muslims are becoming aware that they now have options when deciding on financial products and believes that eventually the UK will see the full suite of investment products already on offer in Muslim countries. He says: “Demand for Islamic finance has been around for some time but what we have seen in the last 18 months is that an education process is under way.” Pension uptake has been modest but Ali attributes this to a traditional preference for property-based investments. He says: “There is a general mindset towards investing in property as pensions have got a bad name with Muslims, just like with the rest of the public.” Globally, the appetite for Islamic investment funds is growing at around 12-15 per cent a year, according to the Institute for Islamic Banking. There are around 100 equity funds which conform to Sharia principles and the institute calculates that around $5bn is invested in them. However, for the most part, access to such funds has been limited to higher- net-worth individuals who can avail themselves of offshore banking. HSBC takes referrals from financial advisers but Islamic Bank of Britain, which recently opened a second branch in Birmingham, does not take referrals. Sufyan Ismail is of1st Ethical is an IFA registered as a third-party introducer with HSBC and is the only registered IFA firm in the UK that also has the backing of Islamic scholars. In the three and a half years since chief executive Sufyan Ismail set up the company in Bolton, it has grown to cover the whole of the England. A significant part of 1st Ethical’s business comes from offering tax solutions that sit with both UK and Islamic law. Ismail, who trained with accountancy firm, Deloitte, says: “The Koran dictates how a Muslim should pass on their estate but if you are a Muslim living in the UK then this is not consistent with UK inheritance tax rules. We offer a solution that is compatible with the Koran and tax-efficient.” The anomaly arises because while only transfers bet-ween spouses are free of IHT for estates over the nil-rate band under the UK law, the Koran dictates a Muslim’s estate must be divided between the spouse, parents and children. The latter two would be hit with a 40 per cent tax charge on the estate in excess of the nil limit rate of 275,000. The firm has also led the way in devising tax-efficient investment vehicles suitable for Muslims. Ismail says: “In theory, investing in an Isa should not be a problem for Muslims but the providers do not offer suitable products.” He points out that bricks and mortar-based property funds such as Standard Life’s are not available for Isa investment. The firm has traditionally created stock portfolios for clients whose risk profiles deemed equities appropriate for their needs but it has also set up what Ismail calls a investment fund representing the “true essence of Islamic finance.” 1st Ethical is awaiting Inland Revenue approval for registering the fund as an enterprise investment scheme. Ismail says the firm is looking to take on a female IFA to help advise the growing number of professional Muslim women. He is also happy to pay introducer fees to other IFA firms who refer Muslim clients to 1st Ethical. He believes his firm could offer the ideal solution for IFAs who cannot afford the time or cost of researching Islamic investments and tax-efficient vehicles for clients.