UK: Islamic Financial Services 2005

UK Market Potential - Muslims and Ethical Customers
Last Updated: 28 October 2005
Article by Ian Youngman

Until recently banks had not taken seriously the religious problems Muslims have with normal mortgages; an attitude of "if they live here they have to have the same products as the rest”. A few banks are trail blazing with specialist financial products. Will insurance be next, or are our insurers too blinkered ?

It is surprising that it has taken financial services companies so long to wake up to this group of potential consumers by launching products which comply with Islamic law.

Until recently, finance was a religious obstacle to Muslims as they had to be sure that the finance complied with Sharia’a (Islamic) law. Islamic financial must reflect and obey the Islamic principles with which Muslims guide their lives.

Some specialists will have you believe that the market is limited to Muslims who are resident in the UK. This is merely a starting point. If insurance/banking works in one country, it is probable that with adaptions it can work in several EU and other countries. On Takaful insurance, UK groups who have pilots have started not in the UK but abroad.

What the clever companies are realising is that the concept behind these products for Muslims can be applied to the increasing number of standard customers who seek ethical products. The doom and gloom brigade argue that no sane bank or insurer would offer these products as they would take away from existing products; isn't that exactly what was said about ethical investments and ethical products.

Barriers to doing business in banking and insurance with ethnic minorities is not just a matter of language. It is a whole cultural one. The customers' personal ethical and religious requirements are often more important than language.

There is a clash between the Muslim faith and the way western banks operate. Traditional UK bank accounts and mortgages do not comply with Islam's sharia law, so in the past people faced a big decision - compromise their beliefs or look for alternative ways to manage their finances. As there is an increasing awareness, even among UK born Muslims, of their faith, many are unhappy with this situation.

While individual mortgages and current accounts have been the most high profile, what is less well known, is the wide range of products and services which are being developed for the UK Muslim market.

  • For individuals this includes savings accounts, buy to let mortgages, personal loans, child trust funds, wealth and investment management services.
  • For businesses we see or are about to see business accounts, commercial loans, charity accounts, commercial mortgages and corporate pension funds.
  • Takaful insurance is not developed, but already launched or being prepared, are motor, home, travel, life and commercial insurance.

With over 1.2 billion Muslims in the world today, it is not surprising to learn that Islamic finance is being given a much higher profile in the financial services industry. The United Kingdom has a Muslim population of 2 million, with an estimated three quarters of these practising their faith by living in accordance with Islamic principles. There are also estimated to be over half a million long term or regular visitors to the UK who would have a use for an Islamic Banking Service.

The community is ethnically and linguistically diverse, and geographically scattered, that makes marketing aimed at attracting the attention of the community a major challenge. The community is increasingly affluent, and comprises a growing number of professionals such as doctors, as well as a substantial small business component.

There is certainly a good potential for taking ideas and formats developed in the UK and operating them in other EU countries.

More than two hundred and fifty Islamic financial institutions are operating world-wide. Islamic banking is estimated to be managing funds up to the value of US$ 250 billion, a 40-fold increase from 1982. The annual growth of Islamic financial institutions has been estimated 15% world-wide over the past 10 years and is expected to accelerate in the foreseeable future.

With a range of Takaful insurances and compliant bank/mortgage products, the market in the UK can grow substantially. Each relies on the other for real growth. In the UK and elsewhere, the great thing about these special products and services is that as they are very ethical, they appeal to non Muslims. You do not have to be a Muslim to have a specialist mortgage or takaful insurance.

For Muslims, living in a manner that is financially Islamic would ensure an equitable distribution of wealth and income for its participants, preventing financial injustice and loss. Islamic Finance should be conducted in a way that is consistent with Islamic principles outlined in Islamic law, sharia, which would ensure maximum socio-economic benefit for all. Islamic banking is based upon a central principle of profit/loss sharing between financier and entrepreneur. This is designed to ensure equitable trade for all parties involved and to prevent the exploitation of either party due to shortfalls or unfortunate circumstances on one of their behalfs. Thus, if a lender lends money to a business, then under Islamic law he is not justified in earning a fixed rate of profit or limiting his losses, rather both parties share the risks and benefits of the deal in an equitable manner that is socio-economically positive for society.

Taking firstly the area that most effects young Muslims, personal mortgages, Muslims are reluctant to use financial facilities that use interest in their mechanism. This comes to the fore, particularly when Muslims seek their first or a further mortgage in the purchase of properties and is relevant for business when they purchase commercial properties. Various solutions have been devised and are fully explained elsewhere in my full report.

What other reports have underplayed and not understood is that it is not a matter just of offering mortgages, bank accounts or just takaful insurance, it is more like the need for turning a vicious circle into a virtuous circle. Mortgages are hard to promote if there is no life or home insurance, or no current account. As the traditional mortgage market shows, the life and home markets are strongly influenced by how many new mortgages/remortgages are being taken out. So the development of life and home takaful depends hugely on the growth of Islamic mortgages. Similarly the development of commercial mortgages, commercial loans, commercial insurance and investments are all intertwined and interlinked. This means that several new types of takaful insurance and finance have to be quickly developed. Once you have a basic platform of a range of acceptable products and services, you can then add specialist covers and enable new providers into the market place. The ****** seems so far the only company to have understood the notion that you need to develop a whole raft of products to enable the individual ones to flower. Once you have several players, you will also get more specialist intermediaries able to assist customers to choose the right combination of products and providers.

This is a small extract from a new 300 page report
ISLAMIC FINANCIAL SERVICES 2005
UK MARKET POTENTIAL by Ian Youngman, analyst and futurist

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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