New services bring Muslim banking in line with sharia law

This week, Fyshe Group, the stockbroker, followed the lead of HSBC to launch a service aimed at Muslims. These developments show how the financial outlook for Britain's three million Muslims has been transformed by a forthcoming tax change that has paved the way for the introduction of products and services meeting their specific requirements.

Muslims have traditionally found it difficult to use financial services designed for western customers. Under sharia, or Islamic law, the payment or receipt of interest is forbidden, so Muslims cannot have conventional mortgages or interest-bearing bank accounts. And investing in shares is subject to numerous restrictions, making it difficult to get good advice.

But this month HSBC became the first High Street bank to offer a home finance scheme and current account to cater for British Muslims. And Fyshe Group has established the UK's only sharia-compliant advisory stockbroking service under the name Fyshe Crestar.

These innovations have been enabled as a result of stamp duty changes announced by the Chancellor, Gordon Brown, in April. Before, Muslims buying homes under this method would have to pay stamp duty twice, when the home was purchased and again when the cost was paid off and ownership changed from the bank to the buyer.

The reason was that, to avoid paying interest, the bank legally owned the house. The buyers paid instalments until the price reached the equivalent of its original value plus rolled-up interest.

After much lobbying from financial institutions and the Muslim community, the Chancellor said in his Budget that from 1 December, only one stamp duty charge would be payable on Islamic home loans.

Servicing the Muslim population is fast becoming a priority among larger institutions. There is a slightly different problem with investing in shares. Banks and insurers are excluded on lending grounds, but so are companies in other industries offensive to Muslims.

So the Fyshe service has been designed to advise clients about companies such as AstraZeneca, Shell, Johnson & Johnson and Volkswagen, which are listed on the main UK and international stock exchanges and satisfy sharia-based investment rules.

The law excludes companies involved in alcohol, armaments, tobacco, pork, insurance, gambling and conventional financial activities. Companies with debt ratios of more than 33 per cent must also be rejected.

Dr Hardeep Tamana, the director of Fyshe Crestar, said: "Islamic scholars have defined the companies which Muslims should not invest in, but simply stripping these out does not constitute sound investment advice. It is vital that the wisdom of sharia is paired with knowledge of how to balance and manage a portfolio. For example, in the 1990s the majority of technology and internet companies listed on the main stock exchanges were deemed ethically acceptable. As a result, many invested exclusively in this sector and were heavily exposed when the bubble burst."

The new services at HSBC have been made available though HSBC Amanah Finance, the Islamic global financial services division of the HSBC Group. Under this scheme, HSBC buys the property and leases it back to the customer over an agreed term, typically 25 years. The customer makes monthly payments of rent and payments toward the purchase price. HSBC owns the property until the customer has made the final payment.

As with a traditional mortgage, the customers choose their own home at the outset and can sell the property at any time. The rent will be reviewed on 1 July and 1 January every year. This is not a new concept and there are other providers of this service. The Ahli United Bank (formerly United Bank of Kuwait), has provided Islamic mortgages since 1996 through its Manzil Home Purchase Plan. It is the main provider, with a portfolio of some £50m covering 500 mortgages. Last year, Ahli United Bank arranged with West Bromwich building society to market the mortgages.

This style of plan enabled Dr Muslim Muhammad Quraishi to own his own home without compromising his beliefs. Dr Quraishi, a general practitioner in Thornton Heath, south London, borrowed £105,000 from Ahli United Bank to buy a £145,000 home, in Thornton Heath, in April last year. "If I hadn't been able to gain finance I would have continued renting," said Dr Quraishi, who lives with his wife Hafsa and two children aged 18 months and two and a half.

Andrew Buxton, the former head of Barclays Bank and chairman of the Bank of England Working Group on Islamic Finance, expects more major financial institutions will enter the market. This, he said, was good news because it would prompt competition among providers of Islamic-style mortgages. Even holding bank accounts is difficult for Muslims, because customers are paid interest on credit balances or are charged interest if the account goes into overdraft.

Noaman Hasan, the UK head of HSBC Amanah Finance, said Muslims had faced the dilemma of either not having a bank account or compromising their principles. The Amanah Current Account at HSBC is similar to a conventional account, except it has no overdraft and no debit or credit interest.

CONTACTS

MORTGAGES:

*Amanah Home Finance (HSBC), 0800 5877 786

*Manzil Home Purchase (Ahli United Bank). 020 7487 6944

SAVINGS:

*Amanah Bank Account, 0800 5877 786

INVESTMENTS:

*Fyshe Crestar, 020 7549 2850