Growing interest in the Islamic mortgage sector

For generations Muslims wishing to purchase a property in the UK have had no choice but to comply with the conventional UK house buying system, borrowing a sum of money and then paying the amount back with interest, even though the concept of paying interest goes against their religious beliefs.

Mary Ring looks at the growing interest in the Islamic mortgage sector

Recently, however, lenders have realised there is a potential market in offering Islamic mortgages, which allows Muslims a purchase method which complies with Shariah law.   Islamic mortgages work on the premise that the bank initially purchases the property, and the buyer then re-pays the bank, paying additional rent for living in the property until the money is paid back in full, after which ownership is transferred.

Due to a lack of providers, Islamic mortgages in the UK have been expensive, costing more than a conventional residential mortgage.   Obstacles faced by Islamic customers have included paying a deposit of at least 20 per cent; paying Stamp Duty twice - first when the bank purchases the property and second when the buyer ultimately takes ownership, an absence of financial regulation, and a lack of market competition.

Slowly though, the government has urged banks to work with Muslims and in 2003, double Stamp Duty on Islamic mortgages was abolished.  In addition, over the last five years more lenders have started to offer Islamic mortgages, including: United National Bank, HSBC's Amanah Home Finance, the Islamic Bank of Britain, alburaq, Lloyds TSB and West Bromwich Building Society.

In tune with this shift, Ed Balls, Economic Secretary to the Treasury, said: "This is a fast growing market. We want centres such as Dubai and Bahrain to look to London as their first-choice financial partner for Islamic financial business."

Overcoming changeCatering to all needsA centre for Islamic finance

In his speech at the Islamic Finance summit, Balls announced changes to the Finance Bill 2007, which include the facilitation of the UK issuance of Islamic securitisation products known as Sukak; guidance on diminishing Musharka, repayment systems and Takaful, Islamic insurance.  In addition the government also welcomed a memorandum of understanding signed between the International Capital Markets Association and the International Islamic financial market to set standards for Islamic capital markets.

Ray Boulger, senior technical manager at John Charcol, commented: "With Islamic mortgages, there are still anomalies that need to be overcome, with the rent side of the product calculated by three months LIBOR, conflicting with Shariah Law. It seems to me that interest is being charged but is called rent to get round the issue. For Islamic mortgages to be done on genuine terms the rent should be calculated on the rent that property would attract, but this seems too difficult for banks to incorporate."

Market diversity

Despite the obstacles, change is slowly occurring in finance industry where both economic and religious interests can be served. The UK is a multi-cultural nation, making it fitting that our financial services reflect this diversity and utilise its potential, whether a global or niche service to the Muslim community. Diversity, responsiveness and innovation create an advantage in all fields of life, so it is fitting that the government should aid it through legislation.

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The source and editors of this article were: www.mortgageintroducer.com