How Effective Islamic Mortgage Market in the Uk

Published: 2021-06-18 01:30:07
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Chapter 1: Introduction
Around two million people in the UK are hesitating to get a mortgage from conventional banks or building societies because of religious obligations. Most of them are Muslims and like to obey the rules of Islam. Conventional banking systems offer the customers to pay interest against their loan or mortgage. According to Islam interest is called “riba”, which is forbidden by the rules of the Holy Quran. So how can the Muslims buy a home or get a loan where they cannot pay the interest. Most of Muslims are confused from where they can borrow money. Go with the conventional banks or newly established Islamic banks, who are not so much experienced in the UK mortgage market.
According to Usmani (2005) the main drawback in interest based system is financier has no concern with money when he gives an interest bearing loan to a client. But in Islamic financial contract cash money is not given to client, first of all they purchase the commodity and transfer to client then all profit and loss will be distributed between parties according to agreed terms and conditions (Usmani, 2005). As the Islamic Sharia is not permitting to pay or receive any interest from conventional nor even from any person or agency, so especially any Muslim is not allowed to use conventional mortgage for religious faith. It is experienced that home or property purchase is too expensive by using the cash on hand. To solve this problem the financial organisation or the bank buy the property or house with their name act as a landlord and the client pay the rent plus some money for the contribution for the property. When the term finished predetermined by the lender and the client the property is transferred to the client that means the client absolutely buy the property.
According to Harding (2009) the Sharia serves mostly as a guide to personal conduct, though some rules are drafted into the legal codes of majority-Muslim states. It’s founded, we’re always told, on revealed truth from the Qur’an and exemplary stories from the Hadith, the sayings and doings of the Prophet. But the real influence of the Sharia lies in the way this material is constantly read and recast by modern Islamic scholars, reinventing old traditions or asserting new ones. Whatever they take it to be, growing numbers of Muslims are keen to stay on the path when it comes to banking and finance. The global Muslim population is upwards of 1.3 billion – roughly one in every five people on earth – and, with a religious revival of twenty or thirty years’ standing, the way of Islam is now a crowded thoroughfare. It is plied by a great diversity of travellers from different parts of the world; some have money to burn, others next to none, but anybody with a modicum of wealth is nowadays a potential opportunity for banks offering Sharia-compliant retail services: current accounts, straightforward financing schemes and home-ownership plans (Harding, 2008). In some countries in the World like Iran, Pakistan and Sudan all banks are currently operating through Islamic financial law but other Muslim major countries like Indonesia, Bangladesh, Malaysia, GCC countries and North African countries operating both conventional and non-conventional banks. Islamic banking services run by Islamic bank and some conventional banks. In the UK some high street banks like HSBC Amanah, Bank of London and the Middle East (BLME) are the main two conventional banks that offer Islamic banking to the customers from all background.
According to UN-HABITAT (2005) Islamic financial systems are located within the larger context of Islamic religious, ethical and economic systems. Islamic finance has seen annual growth rates of over 15% and the Islamic capital invested in global financial institutions is currently estimated at US$1.3 trillion. A key growth area is in the provision of Islamic mortgages, both within the Arab world and in Europe and North America (UN-HABITAT, 2005). Over the last few years some of the UK conventional high street banks like Lloyds TSB, HSBC have introduced Islamic products in several of their branches. In the year 2005 Lloyds TSB bank plc introduced Islamic products to some of its branches. A panel of Islamic scholars look after and guide the bank according to Sharia i.e. the Islamic rules for the Islamic products offered by the bank. Another high street bank HSBC has introduced Islamic products on the brand name Amanah. These two conventional banks are offering wide range of services with different windows on the basis of the Islam, like home insurance, mortgage, current accounts, pension etc.
The Islamic Bank of Britain is the first Islamic bank in the UK started its operation in the year 2004 which welcomes Muslim and non-Muslims alike as customers. It is operating with a few branches mainly in London, Birmingham, Leicester and Manchester where Muslim people are majority. All of their financial products are approved by a committee of Islamic scholar, called the Sharia Supervisory Committee. All of the committee members are expert of the Islamic rules and finance as well. They introduced the banking system, mortgage and other related products as Halal, which may be accepted by the Muslim and non-Muslim customers.
The Prime Minister of the UK Gordon Brown has pledged support for the growth of Islamic finance (BBC news, 13 June 2006). The UK is acting as "a gateway" for the growing industry. In another report of BBC news (17 October 2008) in the midst of turmoil in the global financial system, there is one branch of finance that aims to operate within strict moral and ethical boundaries – Islamic finance. One expert on Islamic finance, Durham University professor Rodney Wilson, points out that no Islamic financial institution has yet failed in the current crisis. He contrasts “excessive risk-taking” in the mainstream financial sector with “a fairly classical banking model” still followed by Islamic institutions (BBC news, 17 October 2008).
According to FSA (2007) The Islamic financial market as well as the Islamic mortgage market has become exceptionally complicated as well as increasingly competitive. Today, practically most of the financial institutions in the western countries are attracting the customers through Islamic finance whether by Islamic Sharia complaint, “Islamic windows” or some other Islamic financial product, like the Islamic mortgage marketing. Most of the expansion of Islamic finance in the UK has taken place in the last five years, but the continuation of Sharia-compliant transactions in the London financial markets goes back to the 1980s (FSA, 2007). .
The aim of this paper is to provide a through outline of the main principles of Islamic finance and practice of Islamic Finance especially in the field of home finance in the UK. The paper emphasises the core principle of Islamic finance i.e. Sharia and Sharia complaint practices in the field of Islamic mortgage market, providing an insight view to understand and find out the effectiveness throughout the Muslim population as well as non-Muslim communities in the UK. By the end of the paper the readers should have a greater appreciation of the various types of ways to find the right mortgage products to be within the Sharia complaint environment as well as get an understanding of the effectiveness with .these kind of products. Through a mixture of different types of graphical presentations of some factors involving in the Islamic financial environment, the UK government policies, difference and comparison between the Islamic mortgage and the conventional mortgage, some examples of different types Islamic halal financial products effective in other developing countries in the world will be presented to get an overview the wide range of factors involved in evaluating and analysing the Islamic mortgage market.

Understand the core principles of Islamic finance
Relate the principles to the Islamic mortgage
The key features of Islamic mortgage
Different types of Islamic contract relating to mortgage
Analyse Islamic mortgage prospect in UK from the various point of views

Dissertation formation
Chapter 1
– Introduction of the objectives & subjects and discuss limitations.
Chapter 2
– Literature review: This chapter will consist of the academic review of the literature on Islamic finance, types of contracts involved in Islamic mortgage and overall review of Islamic mortgage market in the UK.
Chapter 3
– Research Methodology: This chapter will outline the research methodology adopted as well as its possible ways of application by the primary and the secondary data collection.
Chapter 4
– Data and Analysis: In this important chapter various data will be presented through table, chart and different opinions and findings derived from primary research and secondary research to examine the effectiveness of Islamic mortgage market in the UK.
Chapter 5
– Conclusion: This chapter will present the overall conclusion of the study.
Chapter 6
– Recommendation: This chapter will make recommendations, some of which will be general while others will be specific to what will need to be done in the future by the Islamic financial institutions in the UK.
Chapter 2: Literature Review
2.1 Background of Islamic Finance
The Organization of Islamic Conference (OIC) expressed “Islamic financial institution as a financial institution whose statutes, rules and procedures expressly state its commitment to the Principles of Islamic Sharia and to the banning of the receipt and payment of interest on any of its operations” (Hassan, 1999, p.60). Sharia is the path or lifestyle of Muslim, shown and cited in the Holy Qur’an, the sayings and conduct of the prophet Mohammed (PBUH), and the ruling of Islamic scholars.
2.2 Principle of Islamic Finance
McKenzie (2009) stated that “the underlying financial principles in Islamic finance have remained unchanged historically since their development over 1,400 years ago. Financial products must be certified as Sharia compliant by an expert in Islamic law. Certification requires that the transaction adheres to a number of key principles that include:
– Backing by a tangible asset, so as to avoid ‘speculation’ (gharar).
– Prohibition of interest payments (riba).
– Risk to be shared amongst participants.
– Limitations on sale of financial assets and their use as collateral.
– Prohibition of finance for activities deemed incompatible with Sharia law (haram), such as alcohol, conventional financial services, gambling and tobacco.” (McKenzie, 2009)
2.2.1 Riba (Interest)
“The interest that you give in order to increase the wealth of the people, does not increase in the sight of Allah; and the Zakat that you pay in order to win Allah’s approval, its payers do indeed increase their wealth” (Surah Al-Rome no. 39 cited in Shafi and Usmani, 1997, p.67). Prohibition of Riba (Interest)
“The word riba literally means ‘increase’, ‘addition’, ‘expansion’ or ‘growth’” ( Sulaiman, 2003). According to Institute of Islamic Banking and Insurance website (2010) Riba means increase or addition and commonly understood as "interest" charged or received on lending though the legal definition goes beyond just interest.It is one of the three fundamental prohibitions in Islamic finance, the other two being gharar and maysir. . Technically it denotes any increase or addition to capital obtained by the lender as a condition of the loan. In simple terms Riba covers any return on money on money, whether the interest rate is fixed, floating, simple or compounded and at whatever rate which is guaranteed irrespective of the performance of the investment, is considered riba and is so prohibited. Riba, in all forms, is strictly prohibited in Islamic tradition as it is considered an unjust return that leads to unjust enrichment (Institute of Islamic Banking and Insurance website, 2010)
According to Usmani (2005) “exclusion of interest from financial activities does not necessarily mean that the financier cannot earn a profit. If financing is meant for a commercial purpose, it can be based on concept of profit and loss sharing, for which musharakah and mudarabah have been designed since the very inception of Islamic commercial law” (Usmani, 2005, p.10). According to Chapra (1986) it is however, not every increase or growth which has been prohibited by Islam. In the Shariah, riba technically refers to the “premium” that must be paid by the borrower to the lender along with the principal amount as a condition for the loan or for an extension in its maturity. In this sense, riba has the same meaning and import as interest in accordance with the consensus of all the fuqaha (jurists) without any exception (Chapra, 1986).
2.2.2 Gharar
“The Arabic word gharar means risk, uncertainty, and hazard” (Obaidullah, 2005).
According to Institute of Islamic Banking and Insurance website (2010) Gharar is one of the three fundamental prohibitions in Islamic finance, the other two are riba and maysir. Gharar means uncertainty, hazard, chance or risk. Technically Gharar can explained by the Institute of Banking and Insurance, “sale of a thing which is not present at hand; or the sale of a thing whose consequence or outcome is not known; or a sale involving risk or hazard in which one does not know whether it will come to be or not, such as fish in water or a bird in the air. It is an exchange in which one or more parties stand to be deceived through ignorance of an essential element of the exchange. Thus it refers to an element of absolute or excessive uncertainty in any business or contract (Institute of Islamic Banking and Insurance website 2010).
Makhlouf (2000) described “there are several types of gharar , all of which are disallowed (haram). The following are some examples:
– Selling goods where the seller is unable to deliver, – Selling known or unknown goods against an unknown price, such as selling the contents of a sealed box, in absence of any concept of its contents or value in the buyer’s mind, – Selling goods without proper description, such as shop owner selling clothes with unspecified sizes, without providing the buyer the option to inspect the goods, – Making a contract conditional on an unknown event, such as when my friend arrives if the time is not specified, – Selling goods on the basis of false description, – Selling goods without allowing the buyer the properly examine the goods" (Makhlouf, 2000).
Institute of Islamic Banking and Insurance website (2010) describes gharar as "Deception through ignorance by one or more parties to a contract. Gambling is a form of gharar because the gambler is ignorant of the result of the gamble. Gharar can occur in several ways, all of which are haram (Institute of Islamic Banking and Insurance website, 2010).
2.2.3 Maysir
According to Institute of Islamic Banking and Insurance website (2010) “Maysir is one of three fundamental prohibitions in Islamic finance. Maysir is explained as Games of chance or gambling, trying to earn easy money without having to provide equivalent consideration. A prohibited activity, as it is a zero-sum game just transferring the wealth not creating new wealth. The prohibition on Maysir is often used as the grounds for criticism of conventional financial practices such as speculation, conventional insurance and derivatives” (Institute of Islamic Banking and Insurance website, 2010). The Qur’an states that are translated in English, “intoxication, games of chance, worship of idols, and divination by arrows are but an abomination, Satan’s hand I work; avoid it then, so that you might prosper! By means of intoxicants and games of chance Satan wants only to sow enmity and hatred among you, and hinder you from the remembrance of God and from prayer […]” (The Qur’an 5:90-91 cited Rohmatunnisa, 2008). Schoon (2007) explained “Maysir(or speculation) is an event in which there is a possibility of total loss to one party. Maysir has elements of gharar, but not every gharar is maysir” (Schoon, 2007)).
2.3 Types of Islamic Contracts
2.3.1 Mudarabah (finance by way of trust)
Institute of Islamic Banking and Insurance website (2010) An investment partnership with profit-loss-sharing implications. One or more partners as investors (Rab al Mal) provide 100% the capital to an entrepreneur (the partner who provides entrepreneurship and management known as Mudarib) to undertake a business activity. Profit is shared between the partners on a pre-agreed ratio, any loss is borne only by the investing partner(s) alone. For the Mudarib the loss is the share of the expected income for the efforts put into the business activity. The investors have no right to interfere in the management of the business but can specify conditions that would ensure better management of the capital money. In this way Mudarabah is sometimes referred to as a sleeping partnership. As a financing mode, an Islamic bank can provide capital to a customer for a business activity. The customer provides the expertise, labor and management; profits are shared between the bank and the customer according to predetermined ratio while financial losses are borne by the bank and the bank risks losing the capital invested with the customer which justifies the bank’s claim to a share of the business profit. Islamic banks also apply the concept of Mudarabah to pay a return on customer deposits held in investment account. The Bank becomes wholly responsible and liable in the management and investment the customer deposits and utliises the funds as business capital by the bank, the bank will have the right to manage the funds as it thinks fit in permissible activities that it considers are profitable and share the profit on the basis of the agreement made between the bank and the customer (Institute of Islamic Banking and Insurance website, 2010)
According to Siddiqui (n.d) In this mode, the bank, at the request of its client, purchases the specified goods from a third party against payment. Immediately on the transfer of ownership of the goods as also obtaining its physical or, in most cases, the constructive possession, the bank sells these goods to the client at cost plus an agreed fixed profit margin. The client then takes physical possession of the goods and undertakes to pay the price to the bank either in instalments or in lump sum, at an agreed later date. The instances are not lacking where customers of the bank and the seller of the goods are sister concerns. In yet many other cases, the customers of the bank purchase the commodities themselves as agents of the bank and then they repurchase the same commodity from the bank for a cost plus profit to be paid at a mutually agreed later date. In many cases of Murabaha, there is therefore, only a change of name (Siddiqui, n.d).
2.3.2 Musharaka (finance by way of partnership)
According to Institute of Islamic Banking and Insurance website (2010) The literal meaning of Musharakah is sharing, an investment partnership with profit-loss-sharing implications. All the partners contribute capital towards the financing to undertake a business activity. The partners share profits on a pre-agreed ratio while losses are shared according to each partner’s capital contribution. The business activity may be managed by all, some, or just one of the partners. Musharakah allows Islamic banks to provide financing for purchase of an asset required by a customer; the bank invests capital in the co-ownership in the asset with the customer, instead of providing interest-bearing loans. The bank will achieve a return on its capital contribution in the form of ashare of the actual profits earned, according to a ratio agreed in advance. However, unlike atraditional creditor, the bank will alsoshare inany losses. Musharakah is often used by Islamic banks for financing large projects. The concept is distinct from fixed-income investing. A contract of partnership in which two or more partners provide capital and share profits or losses as the case may be. An investment partnership with profit-and-loss sharing. A musharakah contract is similar to a mudarabah contract, the difference being that in a musharakah all the partners contribute to the capital and share in both the profit and the loss. They also have the right, but not the obligation to participate in the management. All partners have a right to participate in the management of the project. However, the partners also have a rig ht to waive the right of participation in favour of any specific partner or person. Profit is shared as per-agreed ratio while the loss is shared in proportion to the capital contributed (money invested by each partner. The term also refers to a financing technique adopted by Islamic banks instead of lending on interest. It is an agreement under which the Islamic bank provides funds which are mingled with the funds of the client and both are entitled to share in the resulting profit on a pre-agreed ratio and share the loss in accordance with their capital contributions. Also termed as a joint venture. Two forms of Musharakah are: Permanent Musharakah and Diminishing Musharakah (Institute of Islamic Banking and Insurance website, 2010).
Saeed (1996) distinguishes three types of Musharaka: the commercial Musharaka, decreasing participation and permanent participation. In a “commercial Musharaka”, which is the most common form, the purpose of the transaction can be the purchase of plant, manufacturing equipment or commodities. Here, the transaction is fixed in its duration and capital provision is mostly short-term. Consequently, the liquidation of the project occurs quickly and capital turnover and returns are usually high. The second type of Musharaka, a Musharaka with “decreasing participation”, is mainly used for project financing in the industrial and agricultural sector and serves to transfer full ownership of the assets in the long-run to the business invested in. The bank’s invested capital is repaid in instalments and the bank receives a proportion of the project’s cash flows for a specified period of time. Profit-sharing can be exercised in three different manners: the bank can either receive its share of the profit on a regular basis (which is sometimes associated with prohibited Riba) and reacquire its capital out of the remaining profits of the partner, or the partner annually buys back a part of the bank’s share in the business including profits, or the partner repurchases the bank ‘s share in bulk after the termination of the Musharaka contract. All three forms are practiced by Islamic banks. Finally, in a “permanent participation Musharaka”, the bank actively contributes to the management of the business financed and shares in the profits and losses until the end of the Musharaka contract (Saeed, 1996 cited Rohmatunnisa, 2008).
2.3.3 Murabahah (cost-plus financing)
According to Institute of Islamic Banking and Insurance website (2010).
“Cost-plus financing – a contract sale between the financier or bank and its client for the sale of goods at a price which includes a profit margin agreed by both parties. As a financing technique, it involves the financier or bank purchasing goods required by the client. The goods are then sold to the client with a mark-up. Repayment, usually in instalments is specified in the contract. Some have questioned the legality of this financing technique with mark-up on cost because of its similarity to riba or interest. Mark up or Cost plus financing. The word Murabaha is derived from the Arabic word Ribh that means profit. Originally, Murabaha was a contract of sale in which a commodity is sold onward at profit. The seller is obliged to tell the buyer the original cost price and the profit mark-up. This contract has been modified a little for application in the financial sector. In its modern form Murabaha has become the single most popular technique of financing amongst the Islamic banks all over the world. The Murabaha mode of finance operates in the following way: The client approaches an Islamic bank to get finance in order to purchase a specific commodity. An interest-based bank would lend the money on interest to this client. The client would go and buy the required commodity from the market. This option is not available to the Islamic bank, as it does not operate on the basis of interest. It cannot lend the money on interest. It cannot lend money with zero interest rate, as it has to make some profit to be in the business. The bank purchases the commodity on cash and sells it to the client on an agreed profit mark-up. The client buy the commodity from the bank on deferred payment basis. Thus, the client gets the commodity on credit for which financing would have been required and the Islamic bank makes some profit on the amount it has spent in acquiring the commodity and selling it on to the client(Institute of Islamic Banking and Insurance website, 2010).
Anotherway Murabahah was described by Bakhshi (2006) is the most popular form of Islamic financing. Within a murabahah contract, the bank agrees to buy an asset or goods from a third party at the request of its client, and then resell the goods to its client with a mark-up profit. The client purchases the goods either against immediate payment or for a deferred payment. This technique is sometimes considered akin to conventional interest-based finance. However, in theory, the mark-up profit is quite different. The mark-up is for the services the bank provides – seeking and purchasing the required goods at the best price. Furthermore, the mark-up is not related to time because, if the client fails to pay a deferred payment on time, the mark-up does not increase due to delay and remains as pre-agreed. Most importantly, the bank owns the goods between the two sales and so assumes the title and the risk of the purchased goods, pending their resale to the client. This risk involves all risks normally contained in trading activities, in addition to the risk of not making the mark-up profit, or if the client does not purchase the goods from the bank and whether they have a justifiable excuse for refusing to do so (Hourani cited Bakhshi, 2006)
2.3.4 Ijara (leasing)
According to Institute of Islamic Banking and Insurance website (2010)Lit: letting on lease. Technically, sale of a definite usufruct in exchange for a definite reward. Commonly used for wages, it also refers to a contract of land lease at a fixed rent payable in cash. It is contrary to "Muzarah" when rent is fixed as a certain percentage of the produce of land banks. It is an arrangement under which an Islamic bank leases equipment, a building or other facility to a client against an agreed rental. The rental is so fixed that the bank gets back its original investment plus a profit on it.
Lit: letting on lease or simply, leasing. Technically, sale of a definite usufruct in exchange for a definite reward. Used for hire of services for wages and also refers to a lease of an asset at a fixed rent payable. As in a normal lease transaction, a lessor who owns the leased asset will lease it to another party (the lessee) in exchange for payment of rental. The lessee will get the full benefit of using the lease asset within the specified period for as long as he adheres to the lease terms and conditions. At the end of the lease period, the leased asset will be returned to the lessor.There are some other variants of leasing which incorporate the transfer or option to transfer ownership of the leased asset from the lessor to the lessee at the end of the lease period; these are referred to as;
Ijarah Thumma Bai – Lease Agreement Incorporating sale of leased asset at the end of the lease period.
Ijarah Muntahiya Bil Tamleek – Lease Agreement with option to own the leased asset at the end of the lease period.
Ijarah Wa Iqtina – Lease Agreement with option to acquire the leased asset at the end of the lease period. Often used in the context of home purchasing
Ijarah wa Iqtina extends the concept of Ijarah to a hire and purchase agreement. It is a contract under which the Islamic bank finances equipment and machinery, building or other facilities for the customer against an agreed rental together with a unilateral undertaking by the bank or the customer that at the end of the lease period, the bank’s ownership in the leased asset would be transferred to the customer. The rental is so fixed that the bank recovers its investment plus a profit. Ijarah wa Iqtina extends the concept of Ijarah to a hire and purchase agreement. It is a contract under which the Islamic bank finances equipment and machinery, building or other facilities for the customer against an agreed rental together with a unilateral undertaking by the bank or the customer that at the end of the lease period, the bank’s ownership in the leased asset would be transferred to the customer. The rental is so fixed that the bank recovers its investment plus a profit. Ijarah wa Iqtina extends the concept of Ijarah to a hire and purchase agreement. It is a contract under which the Islamic bank finances equipment and machinery, building or other facilities for the customer against an agreed rental together with a unilateral undertaking by the bank or the customer that at the end of the lease period, the bank’s ownership in the leased asset would be transferred to the customer. The rental is so fixed that the bank recovers its investment plus a profit. Ijarah wa Iqtina extends the concept of Ijarah to a hire and purchase agreement. It is a contract under which the Islamic bank finances equipment and machinery, building or other facilities for the customer against an agreed rental together with a unilateral undertaking by the bank or the customer that at the end of the lease period, the bank’s ownership in the leased asset would be transferred to the customer. The rental is so fixed that the bank recovers its investment plus a profit (Institute of Islamic Banking and Insurance website, 2010)
“A form of leasing contract in which there is a transfer of ownership of service (for use of an asset) for a specified period for an agreed upon lawful consideration. Instead of lending money on interest, Ijarah allows a financial institution to earn profits by charging rentals for the use of the asset. Often used by Islamic banks for financing. Under this scheme of financing an Islamic bank purchases an asset as per specification provided by the client. The period of lease and the lease rental fee are set in advance and may be determined by mutual agreement according to nature of the asset. During the period of the lease, the asset remains in ownership of the bank (as lessor), but the client (as lessee) has the right to use it (Institute of Islamic Banking and Insurance website, 2010)
2.3.5 Salam (advance purchase)
According to Khan (1996) salam is essentially a transaction where two parties agree to carry out a sale/purchase of an underlying asset at a predetermined future date but at a price determined and
fully paid
for today. The seller agrees to deliver the asset in the agreed quantity and quality to the buyer at the predetermined future date. This is similar to a conventional futures contract however, the big difference is that in a Salam sale, the buyer pays the entire amount in
full at the time the contract is initiated
. The contract also stipulates that the payment must be in cash form. The idea behind such a ‘prepayment’ requirement has to do with the fact that the objective in a Ba’i Salam contract is to help needy farmers and small businesses with working capital financing. The buyer in a contract therefore is often an Islamic financial institution. Since there is full prepayment, a Salam sale is clearly beneficial to the seller. As such, the
predetermined price is normally
than the prevailing spot price. This price
behavior is certainly different from that of conventional futures contracts where the
futures price is typically higher than the spot price by the amount of the carrying cost.
The lower Salam price compared to spot is the “compensation” by the seller to the
buyer for the privilege given him (Khan, 1996).
2.3.6 Istisna’a (commissioned manufacture) (2010) Istisna`a is a contract of exchange with deferred delivery, applied to specified made-to-order items. General agreement upon principles of practice is difficult to identify, however it is often stated that:
a) the nature and quality of the item to be delivered must be specified. b) the manufacturer must make a commitment to produce the item as described. c) the delivery date is not fixed. The item is deliverable upon completion by the manufacturer. d) the contract is irrevocable after the commencement of manufacture except where delivered goods do not meet the contracted terms. e) payment can be made in one lump sum or in instalments, and at any time up to or after the time of delivery. f) the manufacturer is responsible for the sourcing of inputs to the production process.
Istisna`a differs from ijara in that the manufacturer must procure his own raw materials. Otherwise the contract would amount to a hiring of the seller’s wage labour as occurs under ijara. Istisna`a also differs from bay salam in that a) the subject matter of the contract is always a made-to-order item, b) the delivery date need not be fixed in advance, c) full advance payment is not required and d) the istisna`a contract can be canceled but only before the seller commences manufacture of the agreed item(s) (, 2010).
2.3.7 Bai al Inhah
According to Obaidullah (2005) The first and a very popular mechanism used by Islamic banks in South East Asian countries are based on repurchase or bai-al-inah. A murabahah can change into bai-al-inah if the identity of the vendor is not different from its client; when the bank purchases a commodity from its client on a spot basis and sells it back to the client at a cost-plus price and on a deferred basis. The rate of profit in this case is indistinguishable from prohibited riba on a conventional loan (Obaidullah, 2005).
2.3.8 Tawarruq
According to Obaidullah (2005) Tawarruq is another financing product that is cited as a classic case of hiyal, or legal stratagem, but has been permitted by mainstream scholars under certain conditions. Tawarruq becomes a source of funds by combining two separate sale and purchase transactions. An individual in need of funds purchases a commodity on a deferred payment basis from a seller and then sells the same in the market in order to realize cash. This is considered a hiyal, since the individual concerned has no real intention of buying or selling the commodity. He engages in these purchase and sale transactions for realisation of cash (Obaidullah, 2005).
Institute of Islamic Banking and Insurance website (2010) Tawarruq is the mode through which some Islamic banks provide personal financing to facilitate the supply of cash to their customers. As used in personal financing a customer purchases a commodity from the bank on deferred payment basis; the customer then sells the commodity in the market to a third party for cash. Islamic banks also use Tawarruq to guarantee a predetermined percentage rate of return to on investment deposits, buying a commodity from the customer on deferred payment basis then immediately selling the commodity for cash, the deferred payment price paid to the customer being higher than the cash price received by the bank – this is referred to as organised Tawarruq as the purchase and sale transactions are carried out simultaneously and there is no risk for the bank. Reverse Tawarruq is also practiced by some Islamic banks to manage their liquidity, it is similar to organised Tawarruq, but in this case, the banks act as the customer (Institute of Islamic Banking and Insurance website, 2010)
2.4 Islamic Finance rules related to Mortgage contract
According to Khanfar (2009) “to avoid Riba (interest) in a mortgage contract the property should be owned by the bank or the financial institution. In practice this means that a financial institution would buy a property at a certain price (exactly like any other buyer or trader). When the bank becomes a complete owner of this property, it would then be resold at a higher price to any client who would like to buy this specific property. This prospective buyer shows his or her interest by submitting a documented or written promise to the bank assuring that he will re-purchase the property. There is no interest at all because the price is not changeable. Whatever happens after the sale agreement nothing will justify any increase of the cost of the house. There is no room for any speculation to take place in the light of any possible monthly interest rate change. Everything completely relies on the agreed price in the contract, whether payment will be after five years or twenty. The bank deal with properties as an original owner and sell the houses directly to the clients based on instalments or some other mode of the Islamic mortgage” (Khanfar, 2009).
2.5 Types of Islamic Mortgage
2.5.1 Ijara wa iqtina
According to Chapra (1998) since the entire risk is borne by the lessor in the operating lease, there is a danger of misuse of the leased asset by the lessee. The financial lease helps take care of this problem by making the lease period long enough (usually the entire useful life of the leased asset), to enable the lessor to amortize the cost of the asset with profit. At the end of the lease period the lessee has the option to purchase (iqtina’) the asset from the lessor at a price specified in advance or at its market value at that time. The lease is not cancellable before the expiry of the lease period without the consent of both the parties. There is, therefore, little danger of misuse of the asset. A financial lease has other advantages too. The leased asset serves as security and, in case of default on the part of the lessee, the lessor can take possession of the equipment without court order. It also helps reduce the lessor’s tax liability due to the high depreciation allowances generally allowed by tax laws in many countries. The lessor can also sell the equipment during the lease period such that the lease payments accrue to the new buyer. This enables the lessor to get cash when he needs liquidity. This is not possible in the case of a debt because, while the Shari‘ah allows the sale of physical assets, it does not allow the sale of monetary debts except at their nominal value (Chapra, 1998).
2.5.2 Musharaka mutanaqisah or diminishing musharaka
According to Institute of Islamic Banking and Insurance website (2010) another form of Musharakah allowed as a financing mode by Shari’ah scholars in recent years. An agreement that combines the concept of partnership as in Musharakah to invest in a joint asset and leasing. It allows equity participation by a bank and a customer in an asset and provides a method through which the bank keeps on reducing its equity in the project and ultimately transfers the ownership of the asset to the customer. This involves the customer simultaneously purchasing thebank’s equity in the form of unit shares, progressively reducing it until the bank is left with no equity left and thus ceases to be a partner. Until such time, the bank leases its share to the customer who pays a rental to the bank for the use and enjoyment of the bank’s equity share. Islamic banks use this mode widely for financing home purchases, commonly known as Islamic mortgages (Institute of Islamic Banking and Insurance website, 2010)
The principle is used for home purchased or Islamic mortgages. Combining Ijarah with Diminishing Musharakah allows the bank or lender and the client enter into an agreement to jointly purchase a house, the client pays rentals for the use of the bank’s share along with an additional payment towards purchase of the bank’s share. Over time, the bank’s share is reduced and is gradually acquired by the client. When the bank’s share is fully acquired, the bank transfer the ownership to the client. This principle may also be used to acquire any other asset (Institute of Islamic Banking and Insurance website, 2010)
2.5.3 Bai Bithaman Ajil (BBA)
According to Yasin (1997) BBA can be defined as the sale of an object against an obligation to provide payment on the future date. It is a contract of exchange whereby the commodity exchanged is delivered immediately and the price is paid by instalments. It is the most favourite and common type of Islamic financing as few people can afford to buy a house, land, customer goods etc. on cash terms. However, BBA financing is widely use for housing purchased particularly for the house under construction (Yasin, 1997). The financing is based on the BBA contract which is referred to a sale with a differed payment. Normally, BBA has been utilised for financing the house under construction. This situation happens where the customer pay ten percent (10%) payment of the house to the developer upon signing sale and purchase agreement, and the remaining ninety percent (90%) shall be financed by the bank using BBA House financing (BIMB, 1994).
2.6 Islamic Mortgage market in the UK
To get an understanding Ahli United Bank (UK) PLC and HSBC Amanah were discussed here:
2.6.1 The Manzil service
According to the official website ( “Ahli United Bank (UK) PLC (AUBUK formerly known as The United Bank of Kuwait PLC) introduced Manzil Home Purchase Plans in 1997 to help their clients purchase residential property in accordance with their religious and ethical beliefs. This innovative product set new standards for Islamic banking in the United Kingdom (UK), being the first time a U.K. based and regulated bank had issued a product specifically to help Muslims purchase a property within the U.K (
Manzil Home Purchase Plans differ from a conventional ‘interest’ mortgage because AUBUK are able to provide financial help without their clients having to pay them interest. AUBUK can do this by employing two accepted methods of Islamic finance – Shari’a Board” (
2.6.2 HSBC Amanah Finance
HSBC Amanah is the global Islamic banking division of the HSBC Group, responsible for the development of Islamic banking products for distribution to customers of the HSBC Group. It was established in 1998 and has regional offices in the UK, Saudi Arabia, the UAE, Malaysia, Indonesia, Bangladesh and Brunei ( According to (2010) “Amanah Home Finance is based on the Diminishing Musharakah mode of financing and helps the customers to buy their residential property without compromising their beliefs. If anybody already have a traditional interest based mortgage, the product allows them to refinance their property (, 2010).
How it works
The Bank’s interest will decline by the same proportion as it was discussed in the Diminishing Musharakah section. The property will be leased to the customers for the financing term and they will pay the rent. The customers will choose the property which they want to buy and make an application (, 2010). If they meet the criteria, financing will be agreed, then the following steps will take place (, 2010):
§ The solicitor or other legal adviser will be sent the legal documents, and will explain these to the customer.
§ If the customers then want to continue, they will be asked to sign the Amanah Home Finance letter. By doing this the customer will accept that the financing will be made available to them in accordance with the terms of the Amanah Home Finance letter. This means that the product terms and the obligation to enter into the associated documentation becomes binding at this time (
§ The solicitor or other legal adviser will make sure the title of the property is acceptable and approve the contract for the purchase of the property, ensuring that the contract to buy is capable of being transferred to us.
§ Contracts will be exchanged both with the person the customers are buying the property from, or the customer in the case of a refinance and a completion date agreed. This will be a binding contract for the purchase of the property. A date will be agreed for completion when the trust will be set up and the property leased to them.
§ At completion, the property will be held in trust by HSBC Trust Company for each of the party shares equally to the contribution to the purchase price, e.g. 40% for the customers if they have paid a 40% deposit and 60% for HSBC if that is the amount of financing have been provided.
§ HSBC Trust Company as trustee will lease the property to the customer for the financing term. HSBC solicitor will register ownership of the property and the Trust Deed. The customer’s solicitor or other legal adviser will register the customer ownership of tenancy in their name.
§ The customer will need to make a monthly Amanah Home Finance payment to HSBC for the term of their finance. The payments will be made on the 25th of every month, and will be collected from your account by Direct Debit. Your payment will comprise: rent, contribution payment and Charges, if applicable (any other sums payable for a leasehold property and buildings insurance if arranged by the bank) (
§ For each monthly payment that you make you will pay the bank rent for the use of our share of the property and acquire an additional share for yourself. At the end of the agreed term, and when all payments have been made, the customer can exercise the promise to sell and HSBC will transfer the property to the customer” (, 2010).
With this chapter some views and ideas were discussed and with the next chapter the technique of the research methodology will be discussed.
Chapter 3: Research Methodology
3.1 Purpose
In this chapter research methodology is described to find out the way of the analysis of the topic “how effective Islamic mortgage market in the UK”. First of literature review of several concepts relating Islamic mortgage were discussed in the previous chapter.
3.2 Positivist Research
As described by Orlikowski & Baroudi (1991) Positivists generally assume that reality is objectively given and can be described by measurable properties which are independent of the observer (researcher) and his or her instruments. Positivist studies generally attempt to test theory, in an attempt to increase the predictive understanding of phenomena (Orlikowski & Baroudi, 1991).
3.2.1 The Positivist Paradigm: Theories, Propositions, Hypotheses and Hypothesis Testing
A paradigm is a set of beliefs about the nature of social reality, that is, the nature of the
“world” and the individual’s place in it (Guba and Lincoln 1994). Guba and Lincoln note that a paradigm has three dimensions: · What is the form and nature of reality (the ontological question)? · What is the relationship between the researcher and what can be known (the epistemological question)? · How does the researcher find out whatever they believe can be known (the methodological question)? It is critical to remember that paradigms are assumptions that are not subject to proof. They are human constructions that are neither right nor wrong: proponents must argue for their utility (Guba and Lincoln 1994).
The positivist paradigm has the following positions with regard to the three dimensions:
1. An objective reality is assumed which can be systematically and rationally
investigated through empirical investigation, and is driven by general causal laws that
apply to social behaviour. This is sometimes called naïve realism (the ontological
position) (Guba and Lincoln 1994).
2. The researcher and the phenomena being investigated are assumed to be independent,
and the researcher remains detached, neutral and objective. Any reduction in independence is a threat to the validity of the study, and should be reduced by following
prescribed procedures (the epistemological position) (Shanks & Parr, n.d).
3. General theories are used to generate propositions that are operationalised as
hypotheses and subjected to empirical testing that is replicable. Hypotheses should be
testable and provide the opportunity for confirmation and falsification. This is the essence of the scientific method (the methodological position) (Shanks & Parr, n.d).
In the following discussion about theory, proposition, hypothesis and hypothesis testing we assume a positivist position.
A theory is a system of ideas that abstracts and organises knowledge about the social world (Neuman 2000). There are many types of theory including implicit (preconceptions, biases and values etc.) and explicit theory (sets of organised concepts and their interrelationships) (Miles and Huberman 1994). There are highly abstract theoretical frameworks, and focused mid-range theories more suited to empirical work (Neuman 2000). For empirical studies conducted using a positivist, deductive case approach mid-range, explicit theories are relevant. Dubin (1978) notes that this type of theory has three main elements:
· A set of well-defined concepts (or units);
· Laws of interaction (or interrelationships between the units);
· A boundary within which the theory holds.
3.2.2 Propositions
Predictions about the world are made using propositions, that is, conclusions that may be deduced logically from the theory. Propositions link the values of units. Propositions in the viewpoint development theoretical framework will therefore link specific values of viewpoint representation with specific values of viewpoint development role. Dubin (1978) notes that the most usual form of propositions is the “if … then …” format. Darke (1997) identifies two propositions in her study:
· If representation techniques are informal or semi-formal then they are used during the
requirements acquisition viewpoint development role.
· If representation techniques are semi-formal or formal then they are used during the
requirements modelling viewpoint development role (Darke, 1997).
3.2.3 Hypotheses
A hypothesis is an empirically testable statement that is generated from a proposition. Terms in propositions belong to the abstract world of theory. Each of the terms must be assigned an empirical indicator. These empirical indicators are then substituted into the proposition to form a corresponding hypothesis. Once hypotheses have been generated they may be used in empirical studies.
3.2.4 Hypothesis Testing
Hypotheses are tested by comparing their predictions with observed data. Observations that confirm a prediction do not establish the truth of a hypothesis. The deductive testing of hypotheses involves looking for disconfirming evidence to falsify hypotheses (Lee 1989). Falsified hypotheses are then refined based on the reasons for falsification and subjected to further empirical testing.
3.3 Triangulation
Triangulation refers to the use of more than one approach to the investigation of a research question in order to develop assurance in the resulting answer (Bryman, A). Actually the term Triangulation used at land surveying (Janesick, 1994), where it refers to the use of a sequence of triangles to map out an area. The purpose of triangulation in qualitative research is to increase the credibility and validity of the results. Several scholars have aimed to define triangulation throughout the years.
Denzin (1978) identified four basic types of triangulation:

Data triangulation: involves time, space, and persons
Investigator triangulation: involves multiple researchers in an investigation
Theory triangulation: involves using more than one theoretical scheme in the interpretation of the phenomenon
Methodological triangulation: involves using more than one method to gather data, such as interviews, observations, questionnaires, and documents (Denzin, 1978).

The fifth type was added by Janesick (1994) as:
Interdisciplinary triangulation
uses the sources, investigators, theories and methods from other disciplines (Sugarman, 2001). This approach facilitates the development of a more complete picture of the phenomenon under investigation that helps to avoid blind spots or tunnel vision, can enhance creativity and insight (Sugarman, 2001).
Triangulation is one of the several rationales for Multimethod Research (Bryman, A).
or mixed method approaches are a regular topic of debate in academic circles. Scholars from different disciplines suggested using of multiple methods to study complex social phenomena (Brewer & Hunter, 1989; Newman & Benz, 1998; Creswell, 2003). “This is the goal of multimethod research: investigation that integrates quantitative methods that isolate a phenomenon from its context, with qualitative methods that emphasize meaning and an acquaintance with the particulars” (Stange, 2004).
3.4 Qualitative Versus Quantitative Research


Qualitative Research

Quantitative Research


To understand & interpret social interactions.

To test hypotheses, look at cause & effect, & make predictions.

Group Studied

Smaller & not randomly selected.

Larger & randomly selected.


Study of the whole, not variables.

Specific variables studied

Type of Data Collected

Words, images, or objects.

Numbers and statistics.

Form of Data Collected

Qualitative data such as open- ended responses, interviews, participant observations, field notes, & reflections.

Quantitative data based on precise measurements using structured & validated data-collection instruments.

Type of Data Analysis

Identify patterns, features, themes.

Identify statistical relationships.

Objectivity and Subjectivity

Subjectivity is expected.

Objectivity is critical.

Role of Researcher

Researcher & their biases may be known to participants in the study, & participant characteristics may be known to the researcher.

Researcher & their biases are not known to participants in the study, & participant characteristics are deliberately hidden from the researcher (double blind studies).


Particular or specialized findings that is less generalisable.

Generalisable findings that can be applied to other populations.

Scientific Method

Exploratory or bottom-up: the
researcher generates a new
hypothesis and theory from the data collected.

Confirmatory or top-down: the researcher tests the hypothesis and
theory with the data.

View of Human Behaviour

Dynamic, situational, social, & personal.

Regular & predictable.

Most Common Research

Explore, discover, & construct.

Describe, explain, & predict.


Wide-angle lens; examines the breadth & depth of phenomena.

Narrow-angle lens; tests a specific hypothesis.

Nature of Observation

Study behaviour in a natural

Study behaviour under controlled conditions; isolate causal effects.

Nature of Reality

Multiple realities; subjective.

Single reality; objective.

Final Report

Narrative report with contextual description & direct quotations from
research participants.

Statistical report with correlations, comparisons of means, & statistical
significance of findings.

The content in the above table was taken from the following sources:
Johnson, B. & Christensen, L. (2008) Educational research: Quantitative, qualitative, and mixed approaches(p. 34), Thousand Oaks, CA: Sage Publications.
Lichtman, M. (2006) Qualitative research in education: A user’s guide(pp. 7-8). Thousand Oaks, CA: Sage Publications.
Quantitative and Qualitative both methods i.e. mixed approach have been used in this current research. Qualitative research involves the use of qualitative data, such Qualitative data such as open- ended responses, interviews, participant observations, field notes, & reflections (Johnson & Christensen, 2008). On the other hand Quantitative data based on precise measurements using structured & validated data-collection instruments (Johnson & Christensen, 2008).
3.6 Data collection method
In order to analyse and gather the information of the research mainly primary and secondary data both were used.
3.6.1 Primary data
“According to Collis and Hussey (2003) in phenomenological approach the interview questions are unstructured or semi- structured in pattern not closed questions like positivistic approach. The plan is that the researcher will prepare semi-structured questions that are helpful to take maximum information from interviewees because in closed questions it is possible that some important information will be ignored. In semi-structured interviews the researcher has an opportunity to probe various areas and to raise specific queries during the semi-structured interviews (” (Ahmad, 2008)
In this research, interviews were used as the source of primary data to find how Islamic mortgage is operating in the UK. The reporter contract with some Islamic financial organisation like Islamic Bank of Britain, HSBC Amanah and Lloyds Banking Group to understand how Islamic banking system is running in their organisation. Most of the information is available in the official website of the organisations.
Primary data were used from different sources for this paper is as follows:

Islamic Bank of Britain
HSBC Amanah
Bank of London and Middle East
Ahli United Bank

Several interviews were conducted with the bankers and management personals of these banks who are providing Islamic financial products especially the Islamic mortgage, collected the financial data, annual reports of the banks to find out how much money are involved in this sector and who are the people are benefitted with this product. Finally the data and the interviews were analysed to reach to a conclusion and to determine a recommendation.
3.6.2 Secondary data
Secondary data are those that have been generated by others and are included in data-sets, case materials, computer or manual databases or published by various private organisations (e.g. Annual Reports of companies or banks) and public organisations or government departments (e.g. official statistics by the Office for National Statistics). In order to achieve the objectives of this research, secondary data were obtained from multiple sources by visiting the libraries, the banks, the offices or via internet like Office for National Statistics, H M Treasury, Financial Services Authority, KPMG LLP, Islamic banks, Conventional banks that provide Islamic products, International financial journals, various newspaper articles, Islamic financial journal-The Horizon etc.
3.7 Data Analysis
In literature review we discussed the theoretical view of the Islamic finance, Islamic mortgage in the UK which satisfies the first objective of the report. Several interviews were conducted with the bankers and management personals of these banks who are providing Islamic financial products especially the Islamic mortgage, collected the financial data, annual reports of the banks to find out how much money are involved in this sector and who are the people are benefitted with this product. On the other hand secondary data like journal articles, reports and statistics were gathered. Finally all the data were analysed to reach to a conclusion and to determine a recommendation.
In the next chapter in-depth analyses of Islamic mortgage in UK with respect to other factors are discussed to evaluate the evidence were gathered for the academic concepts.
Chapter 4: Data and Analysis
In the Chapter 3 it was described that how the data and information were collected for the research. In this chapter the information will be analysed and reviewed with the concept and theories to find out how effectively they link each other. This section starts with the overview of data on Muslim Population in UK then proceeded to different data with chart and graphical presentation of Islamic bank, Islamic finance, Islamic mortgage and other factors that affecting the Islamic mortgage market in UK. In the different types of data and presentation relating to Islamic finance and mortgage it is possible to get the conclusion.
4.1 The UK Muslim Population
There are around two million British Muslims which is three per cent of the UK total population. After Christians, they are the largest religious group. Based on figures in the UK Housing Review, 69 per cent of people in the UK are owner-occupiers and the figure is similar for the Pakistani and Bangladeshi communities, where most of them are Muslim. These points to the fact that most of the Muslims currently buy their homes through conventional mortgages as a necessary evil (, 30 November 2002)

The UK population: by religion, April 2001

United Kingdom





















Other religion



All religions



No religion



Not stated



All no religion/not stated1






1 Includes 234 thousand cases in Northern Ireland where data is only available as a combined category.

Source: Census, April 2001, Office for National Statistics

According to the Office for National Statistics the Muslim population of the UK is 1.91 millions in the year 2001. Most of the Muslims are from Pakistan, Bangladesh and Middle-East Arab ethnic origin. Due to the Islamic faith and for the ethical reason people tend to divert to Islamic finance. To buy a home and for commercial properties some banks are lending money through Islamic Mortgage.
4.2 Islamic banks in the UK

Table 4.2 Islamic banks in UK

Fully sharia compliant

Bank of London and Middle East

European Finance House

European Islamic Investment Bank

Gatehouse Bank

Islamic Bank of Britain

Islamic windows

Ahli United Bank


Bank of Ireland


BNP Paribas

Bristol & West

Citi Group

Deutsche Bank

Europe Arab Bank plc

HSBC Amanah

IBJ International London

J Aron & Co.

Lloyds Banking Group

Royal Bank of Scotland

Standard Chartered


United National Bank

Source: IFSL
There are five fully Sharia compliant banks have been established in the UK in the last few years and around 17 conventional banks have been set up windows to provide Islamic financial services in the UK. The Islamic Bank of Britain (IBB) is the first established in the year 2004 to operate retail Islamic banking in the region. Although it has struggled in the current financial environment like many conventional banks, since the start of 2008 it has increased its number of accounts by 9 per cent to 74,000 (Oakley, 2009). Since 2008 Islamic Bank of Britain were providing the commercial mortgage only and from 2008 they started to finance the Mortgage with the name Home Purchase Plan to the Muslim and non-Muslim customers (IBB website). European Islamic Investment Bank ( listed in the year 2006 and offering Sharia’a compliant investment banking activities like Islamic Treasury and Capital Markets, Structured Trade Finance, Private Equityand Corporate Advisory, Sharia’a Advisory and Asset Management ( In the year 2007 The Bank of London and The Middle East ( received FSA authorisation and provided innovative Sharia’a compliant funding to diverse client based in the UK, US and Europe. BLME is one of the best capitalised Islamic Bank in the UK, maintains a high level of liquidity that allows the bank to offer flexible and competitive finance solutions in what in recent times has become a less liquid market ( European Finance House (, a unit of Qatar Islamic Bank received banking license in 2008 and offers the customers different types of Islamic financial products for Asset Management, Corporate & Institutional Finance and Real Estate. For Corporate & Institutional Finance EFH is offering wide range of services like Shari’a compliant debt financing, Capital Markets, including Sukuk issuance, Treasury, International Trade Finance, Private Equity and Mergers and Acquisitions. Similarly for Real Estate EFH is also offering Real Estate investment and development advisory services, including site identification, investment analysis, acquisition, due diligence, structuring and execution; Real Estate investment and development project monitoring and general real estate asset management; Musharaka-based Real Estate financing and Development and marketing of real estate funds ( In same year 2008 Gatehouse Bank ( started wholesale investment banking in the city of London. This bank is providing services in the areas of Treasury Products (

4.3 Assets of Islamic banks in the UK

Table 4.3 Assets of Islamic banks in UK

Sharia compliant assets, $m





% change

HSBC Amanah Finance






Bank of London and the Middle East











European Islamic Investment Bank






Islamic Bank of Britain






European Finance House



Gatehouse Bank





*As made available to The Banker





Source: The Banker, IFSL
With these five Sharia complaint banks (as stated in the table 4.2) there are around 17 conventional banks in the UK offering Islamic financial services by setting up windows. These include HSBC Amanah, UBS, Alburaq (ABC International Bank), Lloyds Banking Group, Royal Bank of Scotland, United National Bank and Barclays Bank. HSBC Amanah is the first and only conventional bank with the Islamic window Amanah reported in the Banker’s survey as its assets of $16.53 bn that is 85% of the UK’s identified assets, rose up more than a half from the previous year. Other banks BLME, EIIB and IBB are also growing substantially with comparison with their previous year’s performance (
4.4 Global Assets of Islamic finance

Table 4.4 Global Assets of Islamic Finance

End-year, $bn





Commercial banks




Investment banks




Sukuk issues
















Source: IFSL estimates based on The Banker, Ernst & Young

The Global market for Islamic finance is estimated to have reached $951bn at the end of the year 2008 that is 25% up from $758bn in the year 2007. The total of Islamic commercial banks is ranking on the top for 74% of the total Islamic assets, Investment banks are 11% and Islamic Sukuk issues are 11% of the global Islamic assets. The total growth continues as some new companies started their business in the year (
4.5 Islamic Finance by country

Table 4.5 Islamic finance by country

Banking, takaful & fund assets, $bn

of which







of firms







































































































Other countries














Source: The Banker, IFSL
The leading countries in the world for Islamic Sharia complaint are Iran $293bn for the year 2008, Saudi Arabia $127bn in the second position and Malaysia is $86bn from The Banker’s survey of 500 organisation worldwide. The next few countries are also from the gulf including Kuwait, U.A.E, Bahrain and Qatar. Surprisingly the UK is ranked in 8th position with only $19bn assets, most of the assets based on HSBC Amanah (

4.6 Islamic banks in the western countries & offshore centres
Chart 4.6 Islamic banks in the western countries & offshore centres
Source: The Banker, IFSL estimate for UK
UK Islamic banks exceed any other Islamic banks in the western countries and the offshore centres. It is significant that the UK is the only country in the European
Union to have Islamic banks where there are five in total, in spite of the UK’s 2m Muslim population being much smaller than France’s 7m and Germany’s 4m (Oakley, 2009).The Islamic mortgage market has grown around £500m, which is 0.3% of the total mortgage market in the UK (
4.7 Islamic funds worldwide
Chart 4.7 Islamic funds
Source: Ernst & Young Islamic Funds & Investments Report 2009
The market for Islamic funds has been expanding steadily. According to estimation of Eurekahedge the total number of sharia compliant funds reached 680 funds by the end of the year 2008 having risen more than threetimes from around 200 in 2003. Ernst & Young estimates that the total value of these funds has grown from $20bn in 2003 to $44bn in 2008 (
4.8 Rate of return on assets
According to the estimation of Eurekahedge, returns on Islamic funds were down around 28% in the year 2008 where overall Islamic funds have returned an average of 0.1% a year since 2000 (
4.9 Islamic financial education providers in UK
The lack of human capital in the sector affects all regions, including promising markets such as the U.K. Training of Islamic bankers has not kept pace with the rapid growth of the sector and, as a result, there are shortages throughout the industry (KMPG). According to Research Intelligence Unit, UK is the largest Islamic financial education provider with only 55 Institute in the World leaving behind Malaysia with 24 providers, U.A.E with 18 and Saudi Arabia with 17 Islamic financial education providers (
Chart 4.9 Providers of Islamic financial education
Number of institutions by country providing Islamic financial education
Source: Research Intelligenc Unit
Chartered Institute of Management Accountants (CIMA) is offering the CIMA Certificate in Islamic Finance (Cert IF), which is the first global qualification to be awarded by a proffesional chartered accountancy body on Islamic finance. Securities and Investment institute is awarding The Islamic Finance Qualification (IFQ) jointly with Ecole Superieure des Affaires (ESA), which is a leading leading business school in the Middle East. Another several institutes are also providing Islamic financial education like Cass Business School, Association of International Acoountants (AIA). Institute of Islamic Banking and Insurance (IIBI) is the only specialist professional organisation that provides education, publications and training in Islamic finance (IFSL, 2010).
4.10 Islamic Mortgage through an Islamic Bank
Islamic mortgage is provided in the UK in different banks both conventional and Islamic. Islamic Bank of Britain is the first Islamic bank in the UK established in 2004 and stated to lend Commercial mortgage with the name Commercial Property Finance on base of Islamic Sharia compliant concept, Diminishing Musharaka with Ijara in the year 2006. The chart 4.10 shows IBB net investment in commercial property finance.
Source: Islamic Bank of Britain Annual Report and Financial Statements2008 and 2007
After three years of lending commercial property finance. In the first year Islamic Bank of Britain lended £2.3m only for commercial property finance in 2006, but within three years it increased 267% to £8.6m. In the year 2008 Islamic Bank of Britain first introduced Home Purchase Plans which is alternative of conventional mortgage, also based on Sharia complaint. In the first year the bank invested £7m only. In the year 2008 IBB had a loss of £5.9m less than previous year £6.9m (IBB website).
In the 2009 Islamic Bank of Britain fixed rate Home Purchse Plan (alternative of conventional mortgage). The product was offering a low rental rate of 3.99% and with an administration fee of only £299. This was to competite with the other conventional banks of UK to provide fixed rate mortgage and to attract more new and exisyting customers (, 01 April 2009).
4.11 UK Government Policy
HM Treasury (2008) pulished a report on Islamic finance stated that the Government’s policy objectives for Islamic finance are clear. First, to establish and maintain London as Europe’s gateway to international Islamic finance. Second, to ensure that nobody in the UK is denied access to competitively priced financial products on account of their faith. The Government’s approach to achieving these objectives is characterised by the principles of fairness, collaboration and commitment.Significant progress towards meeting these objectives has been made. The UK is now the leading centre for Islamic finance outside of the Gulf Cooperative Council and Malaysia. London and Birmingham now host the only standalone Islamic financial institutions in the EU. UK consumers can now access a wide range of Shariah compliant retail financial products and services, which are regulated to the same standard as conventional financial products, conferring the same degree of consumer protection (HM Treasury, 2008).
More over in 2003 the Government of UK removed double tax on Islamic mortgages and extended tax relief on Islamic mortgage on Islamic mortgage both for the companies and the individuals. It was mention in the Khanfar (2009) as The Finance Act of 2003 which brought a very notable change in British legal/finance legislation. The importance of this Act lies in the relief which has been introduced to abolish the duple fees of Stamp Duty Land Tax connected to Islamic mortgages arrangements (Paracha 2003, p 12) because, previously stamp duty would have been charged on the purchase of the property by the bank and then again on the purchase by the customer‟ (FBD 2006, p 9 cited Khanfar, 2009). According to Khanfar (2009) the Islamic mortgage has been fortunate in getting legal obstacles removed so that they are applicable under English law. This has been intended to facilitate the needs of Muslim consumers so that they can have an Islamic mortgage with equal safeguards to those available under existing FSA mortgage regulation (Memorandum 2006, p 3). The British government confirmed its positive standpoint by releasing the necessary regulations which allowed the Islamic mortgagees to be treated in the same way as the mortgagees of conventional mortgage modes (Solé 2007, p 17). Based on that, the Islamic mode of mortgage has become more available and more widely accessible (Russell 2004, p 13 cited Khanfar, 2009).
4.12 Regulation and legal frameworks
In a report illustrated by KPMG (2007) Professor Rifaat Abdel Karim, secretary general of the IFSB, also agrees that systemic weaknesses present a big risk. "Muslim member countries need to beef up their financial systems," he explains. "If you are going to have Islamic banks operating in your system, one of the most important issues is to have a high quality regulatory framework and good supervisory standards. That is the safety net. It is good for market players to know what is required from them. There is still a lot to be done given thegrowth and developments that are taking place in the global Islamic finance industry (KPMG, 2007). According to (KPMG 2007)In fact, the U.K. has to date introduced more enabling legislation to facilitate access for U.K. Muslims and others interested in Islamic ethical finance to products consistent with Islamic principles than most of the Islamic Development Bank (IDB) member countries.rising demand for Islamic finance has led to handsome returns for key playerschanging the law or introducing enabling legislation takes a lot of persuasion and time, says one Islamic banker (KPMG, 2007).
4.13 Financial reporting
According to KPMG (2007) the quality and transparency of financial reporting and disclosure in the Islamic finance industry differs significantly from one regulatory jurisdiction to another. There is a general concern in the market and among those interviewed that IFIs, with the notable exceptions of those operating in the U.K., Malaysia, Bahrain and perhaps Turkey, should have more rigor in their disclosure and financial reporting, especially to the general market (KPMG, 2007).
KPMG (2007) The international rating agency Standard & Poor’s, in a report last year entitled Enhancing Financial Reporting and Transparency: Keys to the Future of Islamic Finance’, warned that financial disclosure practices among IFIs fall well short of international best practice. "Standardisation of financial reporting is a key challenge for the rapidly growing Islamic finance industry," said the report, "in order to avoid fragmentation and ultimate ghettoisation at a time when Shariah compliant
investment vehicles as an asset class are coming of age."The International Financial Reporting Standards (IFRS) constitute the main reporting framework for IFIs, but domestic regulation has also encouraged heterogeneity over uniformity. Frameworks in place in the leading IFI countries include IFRS, AAOIFI (Accounting and Auditing Organisation for Islamic Financial Institutions); Malaysian Accounting Standards; and some local GAAPs which are influenced by a combination of IFRS, AAOIFI and local central bank reporting guidelines (KPMG, 2007).
Measuring the Performance of Islamic Products
According to KPMG (2007) the major western rating agencies, such as Standard & Poor’s, Moody’s and Fitch, have been slow to adapt their processes and frameworks relative to the rapid rise of the Islamic finance world. "[The Islamic finance sector needs] a tailor-made rating agency to rate the performance of IFIs using a methodology and nomenclature that is consistent with the specificities of Islamic finance," says Mr. Al- Ghannam of KFH. "The measurement of performance differs even though the start and end result of Islamic finance is the same as conventional financing. However, in the middle, there is a huge difference." It remains to be seen whether the nascent International Islamic Rating Agency (IIRA), set up inter alia by the Islamic Development Bank, can assume this role. The Western rating agencies have so far declined to develop a specific rating methodology and criteria for IFIs and instruments based on their unique Shariah-compliant structures, arguing that their current methodology and criteria for rating conventional institutions and instruments suffice.
To fill this gap, in Malaysia both the Rating Agency of Malaysia (RAM) and the Malaysian Rating Corporation (MARC) have pioneered new methodologies and criteria specifically for rating IFIs and instruments such as securities. Nevertheless, institutions such as KFH are prepared to give the Western rating agencies the benefit of the doubt, stressing that performance measurement is a two-way education process, and that the Western agencies "are learning just as much from us" (KPMG, 2007).
4.15 Difference between Islamic mortgage and conventional mortgage

Sharia’a compliant finance

Sharia’a compliant finance

The customer is a tenant of the Bank
and will pay rent on the occupied share of
the property

The customer is a borrower paying
interest on the loan received from the

Both the bank and the customer have
different responsibilities towards
maintaining the property.

All maintenance responsibilities rest
with the customer.

The income for the bank is from the rent
charged to the customer for using the

The income for the bank is from
charging interest on the loan advanced
to the customer

The bank as a partner in the property will
be subject to the risks associated with
ownership of the property

The bank as a lender will not have
exposure to any ownership risks

The bank will be the holder of the legal
title but the customer will have the
beneficial interest of the property and the
title of the leasehold

The customer is the legal title holder

Source: Islamic Bank of Britain
Home Purchase
Plan Leaflet
The differences were summerised by Khanfar (2009) the crucial point of difference between the Islamic and the conventional English mortgage contract is prohibition of Riba (interest), which is not acceptable in Islamic contracts, including mortgage, under any circumstances (Khanfar, 2009). One of the notable differences between the English conventional mortgage contract and the Islamic mortgage contract is that the client under the Islamic mortgage contract can repay the entire sum to the bank at any time before the end of the agreed period without any penalty which This is not allowed under the conventional mortgage (Khanfar, 2009).
4.16 Comparision of the Islamic mortgage with the conventional mortgage in the UK
In this report the two mortgage providers mortgage rates, monthly repayments and other factors were analysed based on the data available on 27 January 2010 in order to get a comparision between Islamic mortgage and conventional mortgage. Here Islamic Bank of Britain Home Sharia’a Approved Home Purchase Plan and NatWest Mortgages for first time buyers were presented:
The Islamic Bank of Britain has recently reviewed its product offering and will for the time being offer the following product to UK based customers.
§ Product Code: S01108 Standard product
§ Margin 4.25% + Base rate. Current rental rate: 4.75%
§ £299 admin fee
§ Up to 60% finance (minimum deposit required is 40%)
§ Min finance: £70,000
§ Min property value: £117200
§ Ceiling: Margin + 2%
(Source: Personal query through online)
The following is for NatWest mortgage quated from Money Super Market:


NatWest Purchase

Product Name

Offset Flex

Type of Mortgage


Initial Rate






Actual Cost Over 25 Years


Monthly Repayments


Scheme Duration


Lender’s Base Rate




£0 paid to you on completion.

Early Repayment Charge


Number of Monthly Repayments



Variable Mortgage
First Time Buyer
Borrowing £90,000
Term of 25 years
Property value £150,000
Initial monthly repayment £464.26
Located in England

First product is Islamic from Islamic Bank of Britain and second one is conventional from NatWest Bank Plc. For both the product the house price is £150,000, minimum deposit at the time lending is 40% of the total house price i.e. £60,000, admin fee is £299 and length of the contract is 25 years. These all data are similer, but whenever any customer go to lend money to purchase a house they will compare the APR where for Islamic Bank of Britain that is different and the term is used as Current rental rate which is depending on Margin 4.25% + Base rate. As the base rate of the Bank of England is 0.50%, so the Current rental rate is 4.75% and the initial payment is £513.11. When the base rate will go higher it is assumed that the rate may go higher. In that case the cost will increase. With the lowest base rate in the history of the UK home finance from Islamic Bank of Britain shows comparitively higher than one of the conventional mortgage provider.
4.18 Controvercy regarding Islamic mortgage
According to (2010) it is true that Muslim mortgage products are priced higher than conventional mortgage products with customers expected to find a higher deposit. Due the nature of the transaction, institutions have added cost implications and certain there is an element that early innovators do see money to be made. However, as more lenders come onto the market, we will see a rapid cost reduction and more competitive products being made available (, 2010b).
Some of the Muslims confused to go for an Islamic mortgage because they doubts “
If An "Islamic" Mortgage Costs Too Much, Can I Take A ConventionalMortgage?”
(Sunnipath, 2005)They think that “the Murabaha and Ijara Shariah-compliant alternatives for conventional mortgages and these house-financing schemes are nothing but interest-based transactions in disguise” and blamed so called Islamic “mortgages are nothing but conventional mortgages under a new name and a new banner” (Sunnipath, 2005). Here one of the experts Muhammad ibn Adam al-Kawthari from Darul Iftaa, Leicester, UK’s opinion are quouted where he commented presented at Sunnipath (2005) “using Musharaka/Shirka as a mode of financing can be difficult in the current economic setup. The whole economic setup needs to be changed in order for financing to be based on Musharaka. It would be very difficult for a private financial institution to introduce Musharaka as a mode of financing, unless it has the support of the state bank. Thus, due to the fact that there are practical difficulties in implementing Musharaka as a mode of financing in the current economic climate, contemporary scholars have permitted the use of Murabaha (sale on deferred payment basis) and Ijara (leasing) as modes of financing (Sunnipath, 2005).” He emphasised at Sunnipath (2005) “it should always be remembered that, originally, Murabaha and Ijara are not ideal modes of financing in Shariah. They are merely devices to escape from being involved in interest, and not ideal instruments to carryout the real economic objectives of Islam. Hence, they should only be used due to need and as a transitory step taken towards the Islamisation of the whole economy” (Sunnipath, 2005). Moreover he explained “the objective and purpose of Shariah will not be achieved in using Murabaha or Ijara as house-financing schemes. The real alternative is partnership (musharaka), which is a basis for equal distribution of wealth in the society. However, these schemes are not interest-based, hence lawful.” With the above explaination he added “it would be wrong to think that it is permitted to purchase a property with a conventional mortgage by committing a lesser harm. The simple reason is that there is no clash here of two harms in order for one to take the lesser of the two. Rather, one has a choice between an unlawful interest-based conventional mortgage and a lawful Islamic alternative, even though it may not be the ideal alternative. Indeed, one will have to pay more in a Murabaha or Ijara agreement, but that does not make the transaction unlawful or invalid, for the ruling of Shariah is not based on the legal wisdom as explained earlier. If one is unable to purchase a property through a Murabaha or Ijara agreement, then one will have no choice but to seek an interest-free loan from family and friends.” At last he concluded “purchasing a house or property with a conventional mortgage will remain unlawful. It was not permitted by the scholars even before the various alternative schemes came into existence, neither do they permit it after their emergence” (Sunnipath, 2005).
The discussion in this paper demonstrated various reason Islamic mortgage market is growing and expanding in the UK. First of all, Muslim is the second largest religious community in the country, because of them London has been providing Islamic financial services for over three decades. In the recent years this service has begun to receive greater shape (McKenzie, 2009). Though Islamic Bank of Britain is the first fully Sharia complaint Bank in the UK, HSBC Amanah and United Nation Bank started Sharia complaint Islamic Mortgage before the established of IBB. Expressed by Iqbal & Llewellyn (2002) The Islamic financial industry is already one of the fastest- growing industries and has great potential (Iqbal & Llewellyn, 2002).
According to Khanfar (2009) the concept of the Islamic contract is not much different from the concept of English contract and its structure in general terms. The main difference between them relates to the subject matter of the contract. That is, the subject matter of the Islamic contract should not deal with harmful items such as interest, drugs, alcohol, pork, pornography, gambling and so on (Khanfar, 2009)
According to (2009) Nusrat Janjua marketing director of expressed that the Islamic mortgage market has decreased in size by about 35% since last August and I envisage that it will continue to fall and mirror what is happening in the conventional market, certainly for most of this year. The biggest reason for this decline has been the limited availability of mortgage products for first-time buyers and those looking to remortgage. The Islamic mortgage market does not offer any real alternatives for customers unless they have a large amount of equity in a property or a substantial deposit. Islamic lenders recently increased their deposit requirements – alburaq to 35% and HSBC Amanah to 40%. Both these organisations are leaders in the market, with many innovative products. Nevertheless, the Islamic mortgage market remains positive, with all lenders investing in marketing initiatives to drum up business. The Islamic Bank of Britain remains competitive and continues to develop its product portfolio, recently expanding into the Scottish market. But the average Islamic mortgage customer will still struggle to get a mortgage, with a minimum property value requirement of £150,000 (, 2009).
According to Khanfar (2009) The contractual arrangements and product information for these products is complex, which gives rise to a risk that consumers do not have a clear and sufficient understanding of the risks inherent in these products, which could lead to poor consumer choices and so potential detriment (FSA 2006, p 20 cited Khanfar, 2009 ). Moreover, illustrated by Khanfar (2009) in diminishing musharakah home purchase plan the bank or the lender buy the property and as the owner of the property the risk associated with the bank where as in conventional banking it does not exist. According to Islamic mortgages are still not popular throughout the Muslim community in the UK. This is because of inadequate knowledge of Islamic finance among Muslims in the UK. Many Muslims are not sure about the Islamic credentials of Islamic financial services (50 percent), or do not understand what the Islamic finance is about (17 percent), and only around 11 percent expressed their satisfaction with regard to the Islamic products that are offered in the UK. Logically, it would be expected that knowledge about Islamic finance, including mortgages, would be at an even lower level among the non-Muslims (Dar 2004, p 15 cited Khanfar 2009).
According to KPMG (2007) the current lack of qualified Islamic bankers looks set to hamper the development of the sector should it not be addressed The prospects for the growth of Islamic finance look bright. Nonetheless, there are several obstacles currently preventing faster uptake of Islamic financial products. These include the issue of regulatory capital and relative risk weightings under Basel II and the Islamic Financial Services Board (IFSB) guidance; a lack of human capital; piecemeal financial and legal architecture; weaknesses in financial reporting and transparency; and the overarching problem of a lack of Shariah convergence (KPMG, 2007).
According to (IFSL, 2010) the UK market for Islamic mortgages has grown to about £500m, some 0.3% of the total UK mortgage market where as the total Muslim population are 3% of the total population. It is assumed that the Islamic mortgage failed to attract the Muslim people where in Malaysia around 40% of the Islamic financial product customers are non-Muslim (Khanfar, 2009). According to KPMG (2007) the Islamic finance industry is here to stay. In the space of three decades it has transformed from a peripheral activity to a sizeable alternative financial management system. Compared to the conventional financial system, it is relatively young. Industry practitioners are constantly learning from the experience of the conventional system, but the learning curve remains steep. There is a real potential for expansion in retail banking and consumer finance, especially in populous Muslim countries. Non-traditional markets are also expected to become increasingly important, as is the provision of Islamic financial products to non-Muslim customers. The challenge here is to achieve a suitable level of support from the governments and regulators in these markets towards the sector. The growth and diversification of Islamic finance, along with the geopolitical environment in which it operates, means that it would be unthinkable for the global Islamic finance industry "to go it alone". Institutions such as the U.S. Treasury, the U.K. Treasury, the International Monetary Fund, the World Bank, and the Basel Committee of the Bank of International Settlements, are all engaging with the sector in an attempt to "demystify" it and to promote global and industry best practice through the introduction of universal prudential and supervision standards. In addition, with many global banking majors entering the market, there is a real impetus in the West to promote the orderly development of the sector (KPMG, 2007).
According to Khanfar (2009) encouragement and enthusiasm for Islamic financial products can be seen in the speech by Sir Howard Davies, when he was Chairman of the FSA (Financial Services Authority). During a conference on Islamic Banking and Finance in Bahrain in September 2003 Sir Howard Davies said: “there is no objection in principle to the idea of an Islamic bank in the UK, provided Islamic banks met the FSA‟s regulatory requirements, the UK had a clear economic interest in trying to ensure that the conditions for a flourishing Islamic market are in place in London good for Muslim consumers, good for innovation and diversity in our markets and good for London as an international financial centre(Ainley et al 2007, p 9 cited Khanfar, 2009).
According to (2010) In most circumstances, the comparison between the price of an Islamic financial product and a conventional (that is, non-Islamic) product is known as "benchmarking". It is important to understand that the process of benchmarking, involves referring to a product that might use an interest rate (such as LIBOR plus a further profit margin) when determining the level of Rent charged, is not the same as charging interest under a loan. Shariah Scholars have permitted Islamic finance providers to refer to an interest rate benchmark for determining Rent provided that the benchmark is well known to everyone so that no dispute over the amount of Rent can arise in the future. If the characteristics of Ijara are present (e.g. the Bank owns the property and leases it to the customer) it does not matter that the Rent is calculated in this way (, 2010). The Islamic financial products such as Islamic mortgage are marketing in the western world as an Interest free financing, but on the contrary it showed that Islamic mortgage is more expensive in cost and complex to understand even with the Muslim people. The same bank providing the conventional and Islamic mortgage through different window, most of the customers attracted to the convention one as there are several optional available, such as Fixed-rate mortgages, Stepped fixed-rates and Tracker mortgages. In UK mainly only the one type of Islamic mortgage are only available, that is through Ijara with diminishing Musharaka. Earning of money is not so easy, so whenever people are expending they got the bargaining power where to expend money and how much cost effective the product will carry for them. As for example if a person expending £1 only more for each month that will be £300 after 25 years. The calculation is a simple example calculated without the affect of the inflation where as the consumers in the UK have the right to switch to different service provider to reduce cost or to get better customer service.
Chapter 6: Recommendation
When I was started to write a report on how effective Islamic mortgage market in the UK, I was surprised that I have a very few knowledge about this subject being as a Muslim. It happened to most of the Muslims as it was described before and most of the Muslims do not know about and even keep confidence to go for the Islamic Sharia complaint products. One of the main principles of Islamic finance is Musharakah, profit-loss-sharing implication where if the bank makes a loss then the customer also have to share the loss. The Islamic financial institutes should take initiation to spread the knowledge and faith to all over the community both Muslim and non-Muslim as it is not like a religious activity and it may bring benefit in their financial life.
Currently Islamic Mortgage in UK is in the beginning level and in the growth situation as analysed in the previous chapters. Now Islamic banks in the UK act as financial intermediaries providing capital for home purchase, they are not dealing in properties. However, it is to be commended that conventional regulators, moving with times, are helping to create a level playing field for the Islamic finance industry. The UK financial regulatory body, the Financial Services Authority (FSA) has clearly mentioned that it is not favouring nor discriminating in regulating Islamic banks. Because of the different nature of contracts there are practical problems for Islamic banks. For this reason most of the Islamic banks use Sharia-compliant instruments such as murabaha, ijara and diminishing musharakah, but not Sharia-based like mudarabah and musharakah.
It was discussed in the previous chapters that the Islamic mortgage market remains positive, with all the Islamic financial lenders expending their business to attract more and more customers. The Islamic Bank of Britain remains competitive despite a loss in the last financial year and continues to develop its product portfolio by introducing new product home purchase plan, recently expanding its market out of the Muslim majority cities into the Scottish market. But the average Islamic mortgage customers will still have to pay more money to buy a home comparatively with the conventional mortgage for a property value of £150000. According to Sharia making money from money is called Riba, such as charging the interest, is usury and therefore it is not permitted. In order to be in Islamic Sharia complaint the mark-up cost or the marginal cost should be reduced so that general customers can be relieved from extra monetary burden.
Present situation indicates that many conventional bank who are involved in interest (riba) based business adapting and developing Islamic Sharia complaint products with a different window to attract a minority community Muslim which is a niche market or they can use the interest free “fair trade” and “ethical finance” to attract the all human being.
As it was shown, the UK can provide the highest numbers Islamic financial education providers in the world. These could be helpful to the people as well as the employees of the Islamic mortgage lenders. Same type of Islamic mortgage product are marketing in different rates by the different lenders where as Islam is the same to all believers. Difference in accounting standards and financial reporting standards should be resolved to get the transparency about the financial transactions. Many of the Islamic and the conventional providers’ online service is not clearly presented, so most of the people do not get the accurate rate and the calculation of lending expenses of the properties. It will make many people interesting about the product by providing uniform information and database materials by the Government departments and the Islamic financial institutions of the UK. There is a proposal to set up a central Sharia supervisory board in the UK in order to combine all the Islamic financial rules and instrument together. As the UK Islamic financial services industry is still very small compared to some other countries in the World, it would be more practical and cost effective for the Islamic financial institutions in UK to adopt the standards of the existing international standard setting bodies like Islamic Financial Services Board (IFSB), Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI), International Islamic Rating Agency (IIRA), International Islamic Financial Market (IIFM) and Liquidity Management Centre (LMC).
Areas for Further Research
In this paper, I have presented “How effective Islamic mortgage market in the UK”. The concept of Islamic mortgage, the growth, limitation of Islamic financial instruments and other relevant topics were discussed to get a conclusion. There are many other Islamic financial instruments and Islamic financial products like Sukuk (Bond) market which is another fastest growing Islamic product in the UK and another one is Takaful (Insurance) is not so much familiar with the general people of this country. There are some difficulties of Islamic finance to comply with the regulation, legal frame work, the financial reporting standards and audit & assurance of this country and different parts of the World. So in near future extensive, exclusive research and in-depth analysis may be taken to adapt these principles with the Islamic finance.

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