The demand for Shariah-compliant banking is at an all-time high in the United Kingdom. The Islamic banking industry has surged 449 percent since 2012 with bankers noting Islamic finance is becoming an established part of British banking.
Al Rayan Bank, the UK’s largest Sharia-compliant retail bank, reported impressive increases year-over-year for their Islamic banking products. The bank noted that the Islamic banking industry in the UK had grown by an astounding 449 percent over 2012. The most impressive growth being seen in the areas of Home Purchase Plans and Buy To Let Purchase Plans. In fact, Al Rayan notes that Islamic home finance in the UK was at an all-time high in 2016.
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So what exactly is Shariah-compliant lending and how does it work? One India details that Islamic banking is a type of banking that complies with Shariah law. Shariah-compliant banking cannot involve interest as charging or gaining interest is forbidden under the Islamic law.
“Sharia banking or Islamic Finance is a principle by which all forms of interest is forbidden. This model works on the basis of risk sharing and the customer and the bank share the risk of any investment on agreed terms.”
With interest forbidden, this means that Sharia-compliant banks cannot charge traditional interest on loans and consumers cannot earn interest on savings accounts. Instead, the banks are set up on a system of fees and shared risk. The most common types of banking situations are Ijara, Ijara-wa-iqtina, Mudaraba, Murabaha, and Musharaka.
Ijara is lease option provided to Islamic customers in which the bank purchases an item from a customer and then leases it back to the person for a set price over a specified period of time. Ijara-wa-iqtina is similar only the customer has the option to purchase back the item at the end of the term. Mudaraba is a type of investment in which the bank and customer share profits earned. The consumer runs the risk of a loss should the investment go wrong, but the bank does not charge any fees unless the customer profits. So the bank does not make money unless the customer makes money.
Murabaha is more like a traditional loan only risk is placed on the borrower instead of the bank. In this situation, the bank purchases the item and then sells it to a customer on a deferred payment plan. Musharaka is an investment option in which there is shared profit between the bank and the investor. The losses are limited to the original purchase price and the investor pays the bank a rental fee each month depending on the portion of the investment that the bank owns.
In addition to forbidding traditional interest, Shariah-compliant banks are also forbidden from investing in any goods or services that are against Islamic principals such as pork or alcohol. Likewise, any company deemed “sinful” is also excluded.
As migrants from Islamic countries make their way into the United Kingdom, along with them has come an increased demand in modified everyday offerings such as banking. Al Rayan Bank’s Chief Commercial Officer, Keith Leach, notes that the bank is expecting growth to continue in the Islamic banking market.
“There is still substantial room for growth in this market and we expect demand to continue to rise in the coming years.”
The Guardian notes that the UK ranks 11th for Islamic Banking in the world and was the first non-Muslim country to host a World Islamic Economic Forum.
What do you think about the increased demand for Shariah-compliant banking?
[Featured Image by Vahid Salemi/AP Images]