In an increasingly multicultural Britain, several world religions have grown in number. According to the most recent census in 2010, 2.8m people gave their religion as Islam, equating to 4.4 per cent of the population.
When it comes to personal finance, this group has specific needs, as the Koran defines strict rules forbidding many of the mechanics that underpin western markets. Specifically, Islamic law forbids ‘usury’ so a practising Muslim is not allowed to make money from money. The most common interpretation of this is that payment or receipt of interest is forbidden.
Another central tenet of Sharia-compliant products is a shared risk between company and individual. There are five key models of Sharia-compliant finance, informed by these rules and relating to the structures of loans and investment. These are outlined in Box 1.
Perhaps the area where you would expect most difficulty is mortgages, but the principle of Ijara offers a way around the inability to pay interest. As a result, the mortgage market is comparatively well developed. Details of Sharia-compliant products are listed in Table 1.
Within investment, broader Sharia law plays a part in stipulating the ethical criteria of where a fund can invest; alcohol, pornography, gambling and tobacco are forbidden.
Islamic innovation
Despite these limitations, products have sprung up to cater for the burgeoning Muslim population. At the coalface of consumer-facing finance, some mainstream high street banks offer Sharia-compliant current accounts, including Lloyds and TSB.
Perhaps most relevant is the emergence of one institution – the Islamic Bank of Britain (IBB) is making great headway in making Sharia-compliant products available across the market.
The Bank is now 10 years old and conducts most of its business online or over the phone, but also has a high street presence with branches in London, Glasgow, Manchester and Leicester as well as agencies around the UK. It is due to rebrand as Al Rayan Bank following a buyout earlier this year by Masraf Al Rayan, the second largest bank in Qatar.
Despite its current branding as the ‘Islamic’ bank, its products are open to all customers. In fact IBB says many of its customers are not Muslims. The Bank does not differentiate between customers according to faith but has estimated that, during a six-month period this year, 83 per cent of new applicants for its two-year bond were not Muslims.
Many of these will have been drawn by the Bank’s presence at or near the top of the best buy tables, although Samir Alamad, head of Sharia compliance & product development, points out that this is probably an attraction for Muslim customers too.
Table 2 shows that, at the time of writing, IBB offers the second best variable cash Isa rate and the most generous two-year bond. But, according to Mr Alamad, the bank also benefited from an influx of customers seeking ethical products who had previously been customers of Co-operative bank, but had grown disillusioned following that bank’s well documented troubles and shift in ownership earlier this year. Others who have been deterred by all mainstream banks’ reputational issues have also found their way to IBB in search of ethical products.
As Mr Alamad highlights, Islamic banks are characterised by an additional level of governance. The Bank employs a committee of Sharia scholars to interpret the law and ensure its products’ compliance. The committee is independent, does not answer to the board and has the final say in how products are set up.
The wider market
Beyond its own range, the committee has also accredited products elsewhere in the market. The Bank does not offer a pension itself but has authorised a self-invested personal pension (Sipp) through Pointon York.
In July this year IBB gave its approval to an auto-enrolment (AE) product from Carey Pensions. All of these products are monitored by IBB on an ongoing basis to ensure they remain compliant.
AE is a tricky area to navigate as it presents the potential for conflict between state law and religious law, as employers are forced to enrol Muslim employees into saving schemes that go against their faith.
Elsewhere in the AE space, Nest has offered its savers a Sharia-compliant option since its launch, despite low take-up. A spokesperson for the government-backed provider said that fewer than 1 per cent of Nest policyholders had opted to go into the Sharia fund, but that it believed choice was important.
Most of Nest’s direct rivals focus on default funds – Now:Pensions only offers a single, one-size-fits-all fund – but Nest says that members do want a bit of choice, albeit not an overwhelming range, “All of the choices that we offer are based on research that we have done into what people want.”
Having saved for a pension, the decumulation phase has proved difficult for Sharia-compliant planning in the past. Annuitisation can be dismissed as taking an amount of money based on estimated date of death is interpreted as gambling, but one widely overlooked aspect of the new pension freedoms that will come in from next April, is that they will make this a much easier issue to sidestep.
Muslim models
Also in the product stable, kitemarked by IBB is a discretionary portfolio service, populated entirely by portfolios approved by IBB’s Sharia Compliance committee. The service is run by Smartfund and underpinned by Praemium technology. Carrying a 0.85 per cent AMC, it carries a minimum initial investment of £10,000 with minimum contributions of £5,000 or regular monthly payments of £250. The service offers a range of portfolios, all constantly reviewed for compliance by the IBB’s.
For practising Muslims, there is no reason Sharia compliance should prevent access to any area of personal finance. And, as can be shown, the products are growing in popularity among non-Muslims who are looking for an ethical solution or who have fallen out of love with mainstream offerings. There is still room for more innovation, but there seems little doubt that demand already exists.
