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Industry analysis

Adapting to the Muslim market

20 May 2006

As the market moves to better understand and represent the Islamic mortgage sector, Grant Bather explains the differences, opportunities and potential pitfalls within the Muslim market

The Islamic mortgage market has grown considerably over the past few years, with more Muslim borrowers now able to take out a mortgage in the UK, compliant with Sharia law.

Following a period where Muslim borrowers were under represented in the market, a host of lenders and intermediaries alike are beginning to realise the need to appeal to this market, despite its significant differences from the conventional mortgage market.

Market differences

Sharia law forbids the paying or receiving of interest, or Riba, making most of the mainstream mortgage products unsuitable for Muslim borrowers. However, due to increasing demand in this area, lenders have changed their product designs and adopted specific Sharia principles to the market to give Muslim borrowers the opportunity to buy a property, while complying with Muslim law. Under Sharia law, two options are available to potential homeowners: Ljara and Murabaha loans.

With Ljara loans, the bank purchases the property and then rents it to the homeowner. The bank and tenant agree a rental amount, based on a LIBOR, plus a spread formula. The other option available to borrowers is Murabaha lending, where the bank buys the property at a set price, before selling it on immediately to the borrower at a higher price. This payment can be made in instalments, as it is viewed as a sales transaction rather than lending.

Market growth

Following the growth of this market sector, with Data Monitor research predicting the market will be worth £4.4 billion by 2008, a number of lenders have entered the sector to give greater flexibility to Muslim borrowers.

Bristol & West, West Bromwich Building Society, Lloyds TSB, Bank of Ireland and HSBC have all launched Islamic Sharia mortgage offerings.

Julie Blunden, head of market development at Bank of Ireland, says the decision to enter the market followed borrower and broker interaction. She says: “We see ourselves as a specialist niche lender, looking at areas where there might be a perceived barrier stopping people from buying a property. The proposition was almost two years in development. We quickly realised that you can’t do it on your own and we entered into a partnership with the Arab Banking Corporation for the Alburaq (Bristol & West) offer. We each have our own areas of expertise. What we want to do is increase the education of the market and by providing a buy-to-let offer through the Bank of Ireland, we have widened the opportunities available to Muslim borrowers.”

Blunden adds that the market has grown recently, but states: “It will take between three to five years for a fully fledged market, but month-on-month sales have increased. Education remains key to helping the market evolve.”

However, despite the continued growth, Paul White, consultant at Belgravia Insurance Consultants, argues many brokers do not fully understand the sector. He says: “Non-Islamic brokers are not well-placed to advise on this area, as they would not actually know if the mortgage in question would be Sharia-compliant or not. Bearing in mind the lack of the equivalent of a Muslim ‘Pope’, or single authoritative voice speaking for that religion, any potential borrower should check with their local Imam, as to the conformity to law. Brokers can state whether a mortgage is suitable from the financial point of view, but from a religious point of view as well, is too much to expect.”

Development

To highlight changes to the market and its future, as well as tackling issues surrounding this sector, the Muslim Council of Britain, in association with the Organisation of the Islamic Conference, has confirmed it is to highlight government policy changes at its conference. As part of the Islamic Finance and Trade Conference 2006, delegates will help shape a policy paper for government, with practical workshops in developing Islamic finance, complying to Sharia and Financial Services Authority guidelines.

However, despite an increase in borrower, broker and lender interest, some remain wary of advising on Sharia loans. Insurance issues relating to the building and payment protection remain strong, and, with many brokers lacking an in-depth knowledge of the sector, Sharia loans will be viewed as a niche sector for some time to come.

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