The Great Big Sharia Finance Flop

Big banks go cold on Islamic products

Quick, somebody inform Australia’s Assistant Treasurer Senator Nick Sherry who was totally befuddled with it until a few weeks ago,  as we reported here: Suckers for Sharia Finance and here: Sharia Finance A Huge Flop in Britain:

““… misinformed  members of our community are  putting forward negative views about Islamic finance. These have been small in number but they have come in and they are of concern…” Senator Nick Sherry

Apologies are in order, senator!

Big banks go cold on Islamic products As Lloyds cancels its flagship Sharia mortgage, what happened to the big ambitions to woo the Muslim community?

By Julian Knight/The Independent

Where did it all go wrong? It was supposed to be the new frontier for the giant high-street banks, attracting Britain’s two-million-plus Muslims.

Many members of this prosperous minority had felt excluded from the British banking system and its zero-sum game of maximising profit and charging interest – a practice forbidden under Islamic law, or Sharia. As a result, charities have long estimated that the proportion of Muslims who were unbanked – who didn’t have a standard current account – was higher than in the overall population.

Led by Lloyds and HSBC, from around 2002 onwards, UK banks started actively to court British Muslims, offering a range of products, from current accounts to mortgages, which complied with Sharia. HSBC even has its own Sharia-compliant wealth-management company.

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“We have gone to great lengths to ensure that we could offer the Muslim community a range of products which were compliant with the beliefs of Sharia,” says Emile Abu Shakra, Lloyds spokesman on Islamic products. “This involved adhering to Sharia principles of not charging interest, and keeping their accounts separate from the rest of our business, which is non-Sharia compliant. All of these have been done with the oversight of Muslim scholars.”

Even the last government altered the tax system to enable Sharia-compliant mortgages to exist without the threat of having to pay double stamp duty. The idea was to reach out and take genuine account of a community’s concerns, to build a new banking structure, and that then the customers would come – but it seems it hasn’t quite worked out that way.

When quizzed, Lloyds admitted that it had recently ceased offering its flagship Sharia-compliant mortgage – which was launched with great fanfare in 2004. Mr Abu Shakra says that the decision had been taken due to market conditions and that the bank was “looking at options to meet its customer needs”.

Lloyds won’t disclose precisely how much new business has been gathered from its Sharia-compliant range of products, while HSBC has reportedly seen modest annual growth of 15 per cent in account openings; hardly the multi-billion-pound windfall predicted by analysts such as Deloitte at the start of the decade.

Now branch-based marketing of Islamic products has been cut, with Mr Abu Shakra admitting that the bank was looking to “word of mouth” primarily to push its range. But why have the mainstream banks so failed to tap the well of Muslim customers? And this despite constructing products which comply with Sharia and are, according to Darren Cook from price comparison service Moneyfacts: “Intrinsically no different to the products offered by banks which are wholly Islamic, such as the Islamic Bank of Britain.”

The problem relates, as with much in the financial world, to the credit crunch. First, although the mainstream banks’ Islamic products are separated from the rest of their business – and banks make a big play of this – they may have felt some of the fall-out from the damage to banks’ reputations inflicted by the credit crunch.

“Islamic banking isn’t just about ethics, it is a moral code about right or wrong,” says Mohammad Qayyum, the director general of the UK-based Institute of Islamic Banking and Insurance. “The primary purpose of Sharia is that it helps improve fairness and equity in society. Understandably, for some in the Muslim community there is a sense of discomfort about the mainstream banks and the totality of their activities in the run up to the global recession.”

Sub-prime lending to people who couldn’t afford it, dodgy credit-default swaps and those massive bankers’ bonuses are hardly in line with Mr Qayyum’s idea that the Muslim community is looking to entrust their money to banks which improve fairness and equity in society. However, Mr Qayyum adds that it is only a minority of the community which would take such a negative attitude to the big high-street banks, and that the majority understand that the Sharia-compliant part of their business is separate from the now infamous “casino” banking operations.

Separately, though, the squeeze on banks’ balance sheets also seems to be hitting their commitment to Islamic banking: “The cost of offering a mortgage that is Sharia-compliant is much higher than standard, and one suspects that with the bottom line now everything for the banks as they continue to bolster their balance sheets, this sort of expense is probably seen as a little bit of luxury,” says Moneyfacts’ Darren Cook.

But, long term, Mr Cook reckons Britain’s big high-street banks could be missing a trick by going cool on Islamic banking.

“The intention wasn’t to make money as such, but, when in recession, resources become finite and they have to deploy them elsewhere,” he says. “This sort of retrenchment doesn’t just apply to Islamic finance. However, it’s still a massive untapped market base which is there for the taking.”

What’s more, Mr Qayyum reckons that the key points of Sharia can appeal to those outside the Muslim community: “The idea that banks should act by a moral code could be attractive to many in wider society – either Muslim, non-Muslim or those with no faith denomination,” he says.

In response to the charge that Lloyds has gone cold on Islamic banking, Mr Abu-Shakra is adamant: “We are still attracting new business and our products from student accounts through to business accounts are available through every branch in the country. We are completely committed to meeting the needs of all customers from all communities,” he says. However, the decision to stop offering an Islamic mortgage is no doubt damaging to Lloyds’ once lofty ambitions.

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  1. Europe Can Learn From Islamic Finance, Says Malyasian Finance Minister

    KUALA LUMPUR, Malaysia (Ahlul Bayt News Agency) — Europe can learn and gain from Islamic finance, given that financial institutions under it, have remained stable against the backdrop of the eurozone debt crisis. This observation was made by Malaysian Luxembourg’s Minister of Finance, Luc Frieden, in a keynote address at the IFN 2011 Issuers & Investors Asia Forum here today. Frieden said despite the credit crunch that has impacted Europe’s banks, Islamic financial institutions had weathered the global crisis and emerged to be the most well managed.

    “Therefore, we can learn a lot from Islamic finance and from Asia, as we have much in common. The key elements in Islamic finance that we need in the world today, particularly in Europe, are stability, financial partnership, provision of excessive risk and speculation as well as ethical principles,” he added. He said in Islamic finance, the financial relationship between the lender and borrower, had assured the “partnership mentality”, which was found to lead to certain stability.

    Explaining the need to avoid excessive risk taking place, Frieden said this is among the key goals of Europe and is an important feature found in Islamic finance. “The provision against speculation and gambling which is prohibited in Islamic finance, is what we can concentrate on,” he added. He also said the element of ethical principles should not be limited to the Islamic finance industry alone. Frieden gave an assurance that Europe would find a solution to the debt-crisis that had led to volatility in the global economy.

    “There’s no one easy solution and one meeting can’t solve the crisis. We have embarked on a step-by-step process to solve the problems. We will find a solution to the Greek issue. The Euro will be a currency you can count on in the future and see growth,” he said. He said Asia and Europe must join forces for the development and prosperity of the global economy. “Therefore, Asian investors should look at Europe for trade and investment purposes, going forward,” he added.

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