Islamic finance in the UK

Presented by:

Keith Leach Head of alburaq ABC International Bank plc

Presentation Summary

• Introduction • The Government’s approach • Consumer banking products • Takafol • Commercial property finance • The future

Introduction

• ABC International Bank plc, London – Subsidiary of the Arab Banking Corporation, Bahrain Islamic Asset Management Team, London alburaq Real estate finance and investment Leasing Structured finance • ABC Group includes ABC Islamic Bank, Bahrain

Introduction

• alburaq – Specialises in Islamic retail products in the UK • Home finance – Buy-to-let, – Non-UK residents – Self-cert, fixed and variable prices • Commercial property finance • Savings account (new) – Products available directly or through • Lloyds/TSB, Islamic Bank of Britain, IFA market

Islamic finance in the UK

• Strongly supported by the Government – To help the UK’s Muslim community • An ‘inclusive’ approach to help ensure that the Muslim community (and all ethnic/other minorities) do not suffer financial exclusion due to religious beliefs or for other cultural reasons – To promote ‘UK plc’ as a centre for Islamic finance • See London as a global hub for Islamic finance, certainly in the West

Islamic finance in the UK

• Islamic finance experts group – Hosted by the Treasury and meets 3 - 4 times a year, chaired by Economics minister (Ed Balls and now Kitty Ussher) • UK trade and investment (UKTI) – Supports UK business helping them trade internationally and encourages domestic investment

Government support - action

• 1997 • 1999 • 2003 • 2005 • 2007 • 2007 • 2007 • 2008 Labour Government in power Sir Eddie George - Working Group Finance Act – Stamp Duty Islamic Bank of Britain authorised Treasury – IF Experts Group FSA regulation of HPP’s Review for UK Gov Sukuk issuance Gov Sukuk announcement

Islamic banks and windows

• • • • • • • • • • • • • • • Albaraka (mortgages) United Bank of Kuwait (AUB) (mortgages) HSBC (mortgage, current a/c) ABC International Bank (alburaq (mortgage) Islamic Bank of Britain (retail banking) Ansar Finance (community focused NFP) RBS/Bank of Ireland (Commercial property) EIIB (Investment Bank) Lloyds TSB (current a/c) Children’s Mutual (Child Trust Fund) United National Bank (mortgages, Scotland) BLME EFH Gatehouse plc British Islamic Insurance Co (Takafol) 1980s 1996 2003 2004 2004 2004 2004 2005 2005 2005 2005 2007 2008 2008 2008

UK authorised Islamic financial institutions • Islamic Bank of Britain • European Islamic Investment Bank • Bank of London and the Middle East • European Finance House • Gatehouse plc • British Islamic Insurance Holdings

Muslims in the UK

• Increasing population now approaching 2 million • Ethnic origins – 43% Pakistani – 17% Bangladeshi – 9% Indian – 31% others »

Census 2001

• 45% live in London and the South-East

Muslims in the UK

• Comparatively young population – Average age 28 – 9 in 10 under 65 – 34% under 16 years of age • Most interested – 2 nd Generation – Born in the UK – Professional careers – Both male and female

Muslims in the UK

•

411,000 households (Census 2001)

• 183,386 in rented accommodation » 73,034 Council » 41,329 other » 69,023 privately rented • 211,591 home owners » 74,891 outright » 133,912 mortgage » 2,788 shared ownership • 16,438 living rent free

Muslims in the UK

Only Shariah Products Prefer Shariah Products Cheapest Most Convenient Products

Government Support

• Regulation and Tax – Legislation to allow Islamic products to compete on a level playing field – FA 2003, 2004, 2005, 2006, 2007 – Alternative finance return and profit share return economically equivalent to interest – Regulation of Islamic home finance (HPPs)

HPP Regulation 2007

• Effective 6 th April 2007 • Home Purchase Plans • Sympathetic disclosure documents • IDD, RFS, FIS • Few intermediaries authorised • Fewer offering an advice service • VAT

Residential finance

Financing techniques • Murabaha • Ijara • Diminishing Musharaka • Commodity Murabaha (Tawarruq)

Savings options (not many)

• Mudaraba and Wakala accounts – IBB • P&L accounts -Commodity Murabaha based – Alburaq • Protected Equity Linked Account – Based on Wakala principles pays a return based on the change in value of a basket of Sharaih compliant shares • Child Trust Fund • Collective Investment Schemes – HSBC and Scottish Widows Global Islamic Equity Funds

Takafol

• British Islamic Insurance Holdings – FSA authorised April 08 – Products to be launched end of the 2 nd • First products – Car Insurance – Property insurance qtr • HSBC Amanah – Takafol property insurance

Commercial Property Finance

• Market – UK residents for business purposes – UK residents for investment purposes – Non-UK resident investors – Corporate or individual purchasers • Estimated 100,000 Muslim owned SMEs in the UK

Financing Models

• Murabaha • Ijara • Commodity Muarabaha (Tawarruq) • Diminishing Musharaka • Parallel Istisna (development finance)

Government Support

• 2006 – • 2007 – SDLT relief extended to corporate entities HMRC guidance on tax treatment of all financing techniques covering » Capital allowances » VAT » CGT

Issues for financiers

• Property usage screening • Must be permissible activities • Potential contamination liabilities • Contaminated land • Asbestos • Other 3 rd party liabilities as owners • Personal injury • Negligence • VAT • Payable on purchase price • Payable on rental payments • FRI leases • Owner’s obligation to insure • Owner’s obligation to maintain

Future

• Ongoing tweaking of laws and regulations • UK Government Sukuk • Islamic funding for Government PFI projects • Securitisation of UK Islamic mortgage portfolios • More Islamic finance companies in London

Islamic Finance in the UK

Presented by:

Keith Leach Head of alburaq ABC International Bank plc

23 rd October 2007