Tuesday July 15th 2003

A farewell to usury

A specialist firm of Muslim financial advisers is serving growing demand, says Jonathan Guthrie

One side-effect of the September 11th 2001 attacks has been a growing demand for Islamic financial products in the UK, according to Sufyan Ismail, chief executive of 1st Ethical, a Muslim financial adviser.

Following the outrages British Muslims were subjected to close media scrutiny, much of it negative. Then the UK participated in US-led military action in Afghanistan and Iraq. The distinctiveness of Muslim identity became clearer as a result of increased prejudice and participation in anti-war campaigning. "There has been a ressurgance in Muslims examining what their faith means to them," says Mr Ismail.

The result, he says is that many British Muslims are becoming more observant, which makes them increasingly keen to buy financial products compliant with Islamic principles. That appears to be borne out by the success of 1st Ethical. According to Bashir Timol, deputy chief executive , the Bolton-based business made £500,000 in commission income in its first year and should triple that figure in the second.

When 1st Ethical started trading - by coincidence on September 11th 2001 - it had just two staff: Mr Ismail and his secretary. Now the business has 13 people and expects to employ another 12, with representatives working in all the UK's main Muslim communities. The entrepreneurial drive of Mr Ismail, who is 27, was recently recognised when 1st Ethical won the north-west section of the Shell Live Wire Entrepreneur of the year contest.

Financial advisers, even independent ones, are pretty unpopular with the public, who often see them as high pressure insurance salesmen. However, Mr Ismail also seems something of a social visionary: on top of providing financial advice, 1st Ehtical gives more than 20 per cent of it's profits to Muslim charities and it's donations have paid for a tank that provides a village in Gujarat with clean water. He says 1st Ethical has been warmly received by Muslims because it helps them comply with their religious obligations. "We are perceived in a noble light,"

The problem for 1st Ethical is opposite to that facing conventional financial advisers: it has plenty of warm leads but can sell only a limited range of products.

'A mortgage was something I could not contemplate. But I am considering joining one of those schemes'

There is a huge variety of conventional ethical funds that suit Muslims because they forswear investment in companies producing alcoholic drinks, cigarettes, armaments or pornography. But they all fall down by charging interest for lending cash. And the charging or paying of interest is, Islamic scholars agree, equivalent to riba or usury, which is banned four times over in the Koran.

1st Ethical will sell these funds to clients, arguing that it is for them to decide how observant they wish to be. But strict Muslims have to opt for a specialist fund that earns no interest on it's cash. 1st Ethical has just two of these at its disposal - the City Financial Global Islamic Equity Fund from HSBC - though it is working on setting up a third with Standard Life.

While ordinary mortgage brokers can sell an array of products, 1st Ethical has to steer clients towards financing from either United Bank of Kuwait or Pakistan's United National Bank. Neither is a high street name in the UK.

HSBC changed the landscape this week by becoming the first big British bank to offer Islamic home finance. 1st Ethical staff will be among the first intermediaries to sell the product on an agency basis. The move from HSBC through it's Islamic business arm, was prompted by the decision of the government to tackle the problem of double stamp duty, which had hampered the development of Islamic home finance in the UK. Typically a Muslim who has bought a house using a conventional mortgage would switch to Islamic finance by selling the property to an Islamic bank. But that generates a second stamp duty charge, inflating the cost of the transaction.

In this year's Budget Gordon Brown, chancellor, abolished the double charge, so a specialist market for Islamic mortgages can now develop in the UK. There are about 1.6m Muslims here and an estimated 130,000 own their own homes. A minority have bought for cash, often by scraping together interest free loans from friends and relatives. But about 70 per cent use conventional mortgages, HSBC estimates. Many would switch if they could do so at a sensible cost.

Some observant Muslims, such as Shaykh Ibrahim Mogra, assistant imam at the Masjid Umar mosque in Leicester, limit themselves to renting. Mr Mogra says: "The idea of a mortgage was something I could not contemplate. But I am considering joining one of these new schemes." He welcomes the HSBC home finance package, saying that Muslims with mortgages often live with "a sense of guilt."

Noaman hasan, head of HSBC Amanah in the UK, explains that his bank's product has been approved by Koranic scholars led by Mufti Muhammad Taqi Usmani, an expert in Islamic finance based in Pakistan. It uses the ijrah system, similar to a conventional lease and buy-back arrangement. The bank buys a the property for its customer, who pays a monthly charge consisting of a capital repayment and rent. At the end of the term, say 25 years, the occupier owns the property outright. Ijrah is generally cheaper than murabahah home finance packages. In the later the bank agrees to sell the occupier his house at a steep premium to the purchase price after a fixed period. Both options are included in the financing packages from United Bank of Kuwait and United National Bank, offered by 1st Ethical.

In time, Mr Ismail also hopes to sell musharakah home finance. This is a partnership under which the occupier and the financer share the returns of the eventual sale of the property. This, Mr Ismail says, provides the highest level of compliance with Islamic principles.

Mr Ismail's ultimate ambition is to set up the UK's first homegrown Islamic bank, paying savers variable returns based on the fortunes of business borrowers. It is an intriguing idea: a finance system based on equity ownership rather than fixed-interest debt. It would, Mr Ismail says, be fairer and more flexible - and more complaint with sharia law.

Mr Ismail says that as "a brown man with bread" he now gets "frisked like there is no tomorrow" at airports. He is indeed plotting a revolution - but only of a financial kind.