:: You are here: > Islamic Mortgages / Halal Mortgages > Knowledge > Shariah debate > Research and Reports > Islamic Finance
:: You are here: > Islamic Mortgages / Halal Mortgages > Knowledge > Shariah debate > Research and Reports > Islamic Finance
Robin Matthews / Issam Tlemsani / Aftab Siddiqui - Centre for International Business Policy, Kingston Business School. (Below we give an overview of their main findings and report - for a full report please contact - I.Tlemsani@kingston.ac.uk , Tel/Fax: 0044 208 547 8674).
Introduction
Islamic banking is a growing phenomenon, which came into existence to satisfy the financial needs of devout Muslims (1.6 billion Muslims around the world) who observe the prohibition of Riba (usury). Many economists1 have studied the macro-economic properties of banking institution in the framework of an isolated and ideal Islamic economy. In the age of integrated global financial markets, the instantaneous transformation of an entire financial sector to profit-and-loss sharing is very unlikely: so what is the outlook for Islamic banking?
UK Shariah Compliant Market Analysis
According to the International Association of Islamic Banks (IAIB), by 1998 there were 176 Islamic banks and financial institutions operating in 38 countries. These institutions had total assets of $148 billion, paid up capital of $7.3billion, and generated $1.2 billion in aggregate net profits latest year of operation. Sir Howard Davies, chairman of the Financial Services Authorities in the UK said: 'there was a gap in the market for retail sector Islamic banking products, which would cater to nearly two million UK Muslims'.
There are approximately 3 million Muslims permanently resident in the UK (i.e. 50% of all UK ethnic minorities) with estimated saving of around 1 billion, while over half a million Muslims visited Britain in 2001, spending nearly 600 million3. The 5,000 richest Muslims in the UK have liquid assets of over 3.6 billion, according to wealth analysts' data monitor4 HSBC, the UK-listed bank, which has 2 billion assets under management and three Islamic funds, is predicting growth of assets under management of up to 40 per cent for year 20025. If we follow the Datamonitor (1999) research, then this indicates that out of their 1.65 million estimate, 300,000 Muslim adults in the UK have annual incomes in the range of 30000/= and above (see table 1). This means that approximately 25% of all adult Muslims are excellent prospects for banking and financial products.
Geographic Distribution of Muslims in UK
The distribution of Muslims in the UK falls into a number of well-defined regions in the South (London, Luton and Slough), the Midlands (Birmingham and Leicester), and the Pennines (Manchester, Lancashire, Leeds and Bradford), as well as smaller centre in Glasgow, Cardiff/Bristol and Bath. In some heavily populated areas, such as Leicester and Luton, for example, up to 20% of the population is Muslim.
Indeed, Leicester is set to become the first ever 'Islamic City' in the UK, within the next decade, as the Muslim population rises to above 50%; i.e. an 'ethnic majority'. Much of the Muslim population is centred on the South East of England, in Slough, and in North, West and Central London. Datamonitor estimates that 8% of the population in Greater London is Muslim, amounting to approximately 725,000 persons. This means that over 40% of the Muslims in the UK live in the Greater London area.
Muslim Population Profile
The Muslim population in the UK is predominately from the ethnic and cultural backgrounds of India (10%), Pakistan (38%), and Bangladesh (19%). (Approximately 16% of UK Muslims are of Middle Eastern origin, with the remainder coming from Africa (13%), Europe (3%) and Asia (1%).). Historically the ethnic groups originating from the Indian sub-continent have shown a higher rate of population growth, as compared to other groups in the UK; a trend that is likely to be confirmed anew by the forthcoming Official Census in 2001.
The second and third generations Muslims from these ethnic groups have been born British nationals. They have shown tremendous success in educational and professional achievements. The group earning 30,000 or more per year basically comprises of these educated professionals. Research also indicates that these professionals are more knowledgeable of their religious and social roots. Thus, there is a natural inclination among them to align their financial decisions with the Islamic faith.
UK Mortgage Products Potential
A salient feature of home ownership in the UK is the high proportion of homes purchased through mortgage loans. As such, acquiring a mortgage is one of the first financial decisions that an individual makes in order to lead an economically secure life. According to the Britain 2001 Year Book, during 1999 British banks have written 756,000 mortgage loans while building societies and other lenders have written 426,000 mortgage loans.
However, none of these 1.18 million mortgage loans were designed to provide the Muslim community in the UK with a mortgage product in compliance with the injunctions of the Islamic faith. It is estimated that the Muslim population in the UK secures 5% of total mortgages.
The Land Registry UK recently published that for the year 2001-2002, the average value of residential property In UK is 121,000, taking this estimate in account along-with the Muslim share of the existing mortgage market, the total market size for the Shariah compliant mortgages is in excess of 7 billion.
The demand for the Shariah compliant mortgage by the ethically motivated consumers would also be significantly high, however due to unavailability of the relevant data it is not possible to provide an exact market size for the ethical consumer segment.
Conclusion
Islamic principles of interest are concerned with issues of fairness and justice rather than efficiency narrowly defined. These principles focus on the necessity of sharing risk in a fair and stable society, and upon problems of exploitation in markets where power is asymmetric this is the real Riba (usury) issue.
Our case analyses shows that the principles differences between Islamic and conventional housing finance is that the former is equity based and the latter is debit based. In an Islamic mortgage situation both the bank and the client share ownership [equity] and therefore share the risk of equity ownership. In conventional banking the client owns all the equity and the banks loan to the client is secured on the value of the property.
The Islamic approach emanates from a foundation set of ethical principles. So discussion of Islamic finance in connection with global financial practices introduces an ethical dimension that is welcome. Also as Khan (2002) points out an Islamic system of finance might create a more stable world financial market.
