Islamic banking on the rise

By JANE WARDELL
AP Business Writer

JUN. 6 5:47 A.M. ET Retail banks offering interest-free mortgages and declining to charge fees for millions of customers?

That is increasingly the reality as banks try to tap into the booming Islamic finance market, tailoring products for consumers who follow strict Shariah law, which outlaws the giving or receiving of interest.

Recognizing the demand, the U.K. Securities and Investment Institute announced this month that it has teamed up with Lebanon's Ecole Superieure des Affaires to develop a new specialist qualification in Islamic banking for financial providers.

The institute hopes to build on the success of Islamic banking in mostly Muslim countries like Malaysia and Turkey, as well as in European countries such as France, Germany and the Netherlands, which have sizable Muslim populations.

Islamic finance is a major force in the world's economy, with Britain's Financial Services Authority estimating that assets held in Shariah-compliant accounts worldwide total US$200 billion to US$500 billion (euro160 billion to euro400 billion) and growing at 10 to 15 percent a year.

But it has largely been confined to major investors, with average Muslim consumers in the West looking to live by Shariah standards finding few options.

Many of Britain's 2 million Muslims have been locked out of buying their own home because Shariah law prevents Riba, or usury -- meaning traditional mortgages are off limits. Investing poses further problems: Earning funds from industries such as alcohol and tobacco production is also forbidden.

"There's just been an absence of understanding," said Ruth Martin, managing director of the Securities & Investment Institute. "There has been a real gap and it has been a barrier to people understanding Shariah law and Islamic banking and to its development."

But Western banks are waking up.

The Islamic Bank of London, launched in September, this month began rolling out postal and telephone banking to reach Muslims beyond its branches in London, Birmingham and Leicester. It aims to open seven more branches across the country by the end of the year.

Managing Director Michael Hanlon said part of the job is educating Muslims that alternatives are available. "Islamic banking is now part of the modern world economy," he said.

LLoyds TSB Group PLC launched a Shariah-compliant current account in February and home financing in March.

"There are approximately 2 million Muslims in the U.K. at the moment and our independent research shows that 75 percent of those want banking products that fit with Islamic law," said spokesman Emile Abu-Shakra.

Lloyd's current account pays no interest and has no overdraft facility. Under the Ijarah home financing plan, the bank buys up to 90 percent of a house on behalf of a customer, who then pays back an agreed amount each month along with a rental payment as an acknowledgment that the property belongs to the bank until all payments are completed.

HSBC Holdings PLC, Europe's largest bank by market value, is ramping up the services offered by its Amanah -- or "trust" -- division, which opened here in mid-2003.

Under the guidance of its Shariah board of scholars, the bank plans to launch Takaful insurance for buildings and contents in July and commercial finance by the end of the year.

It is also switching its home financing plan from the Ijarah principle to a system called diminishing Musharakah -- which incrementally transfers ownership of the property from the bank to the buyers as they make payments -- after the Shariah board advised it was more in line with Islamic law.

Amjid Ali, U.K. head of HSBC Amanah, agreed that education will expand the market.

"If I take myself as an example, I was born in this country, went to the mosque from the age of 5 ... it wasn't until I was 16 that I read my first translation (of the Koran) and I came across the issue of Riba," he said. "At that point in my life, it wasn't the most important thing, but then later on ... I came to understand how serious an offense it is in Islam."

The Securities and Investment Institute is putting together a panel of Shariah scholars to advise on its qualification and plans to begin teaching in early 2006.

The scholars will have to address debates such as whether investment in armaments industries should be banned -- the Islamic Bank of Britain does not allow it but the London-based Institute of Islamic Banking argues that it is a requirement as part of the "sacred duty of all Muslims" to defend Islam.

The institute's course will initially be available in Lebanon and Britain and will later be rolled out to some of the other 30 countries where it offers qualifications.

Islamic banking is also expanding in France and in Germany. Deutsche Bank AG, ABN Amro Holding NV, Societe Generale SA, and BNP Paribas have all established such units in the past few years.

In Malaysia, Islamic financial instruments account for 10 percent of public and private financial dealings, up from 6 percent in 2000, the Malaysian central bank said.

Islamic banking can be profitable. Law firm Trowers and Hamlins said that U.K.-listed, Shariah-compliant shares in the Dow Jones U.K. Islamic index showed a return of 15.2 percent during the past 12 months, twice that of the benchmark FTSE 100.

Alain Balian, Vice-Governor of the Central Bank of Lebanon, which approached the Securities and Investment Institute about the qualification, said the products can also be attractive to investors of other faiths.

"Especially in an environment like the U.K., where you don't have a fixed interest rate for the duration of the mortgage over a period of 20 or 30 years, like you have in the U.S. for instance," Balian said, "an Islamic mortgage could be an interesting alternative."