Q&A: Islamic Finance
Reprinted from BBC Online:
The UK’s first Islamic Child Trust Fund(CTF) has been launched.
There are now a range of products – including current accounts, mortgages and even personal loans – which comply with Sharia Islamic law.
BBC News examines Islamic finance and how it works.
What is Sharia law?
Under Sharia Islamic law, making money from money, such as charging interest, is usury and therefore not permitted.
Wealth should be generated only through legitimate trade and investment in assets.
But investment in companies involved with alcohol, gambling, tobacco and pornography is strictly off limits.
How does Islamic finance work?
The overarching principle of Islamic finance is that all forms of interest are forbidden.
The Islamic financial model works on the basis of risk sharing.
The customer and the bank share the risk of any investment on agreed terms, and divide any profits between them.
The main categories within Islamic finance are: Ijara, Ijara-wa-iqtina, Mudaraba, Murabaha and Musharaka.
Ijara is a leasing agreement whereby the bank buys an item for a customer and then leases it back over a specific period.
Ijara-wa-Iqtina is a similar arrangement, except that the customer is able to buy the item at the end of the contract.
Mudaraba offers specialist investment by a financial expert in which the bank and the customer shares any profits.
Customers risks losing their money if the investment is unsuccessful, although the bank will not charge a handling fee unless it turns a profit.
Murabaha is a form of credit which enables customers to make a purchase without having to take out an interest bearing loan. The bank buys an item and then sells it on to the customer on a deferred basis.
Musharaka is a investment partnership in which profit sharing terms are agreed in advance, and losses are pegged to the amount invested.
What types of Islamic financial products are currently available?
Nearly all the traditional retail banking services expected from established High Street banks are available in a Sharia compliant format.
The Islamic Bank of Britain offers a Sharia compliant current account, mortgage and even personal loan.
HSBC offers a Islamic current account and mortgage.
A handful of other banks – including some of the biggest international names and the Middle East’s biggest traditional banks – also offer financial products in the UK tailored for Muslims.
And from 1 September, Children’s Mutual is to offer a Sharia compliant Child Trust Fund.
How strong is the demand for Islamic finance?
Banks are hoping to attract business from Britain’s two million Muslims, many of whom do not use established banking services because they are in conflict with Sharia.
Children’s Mutual is targeting the parents of 120,000 Muslim babies with it’s Sharia compliant Child Trust Fund.
In a survey last year, Datamonitor said that demand for sharia-compliant mortgages was strong, and could yield up to £4.5bn in advances by 2006.