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Financial Times: New Islamic banks grow steadily in UK

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  • Amidst global economic uncertainty, three Islamic banks in the UK are reportedly continue to grow. This is largely contributed to to the strict Islamic banking principles that shunned excessive speculation and highly leveraged activities that brought down reputable conventional financial institutions. Financial Times reported.

By David Oakley, Capital Markets Correspondent

Launching a bank in the face of the worst financial crisis in almost 80 years does not appear to make business sense.

But that is precisely what investors in two of Britain’s five Islamic banks did as demand continued to grow in Europe for financial products that avoided paying interest, in line with strict religious rules. These products pay profits from an underlying business or rent from a building used as collateral to raise money.

The European Finance House launched in January and Gatehouse Capital followed in April, while a third Islamic bank, the Bank of London and the Middle East, opened for business in July last year – a month before the August credit crunch surfaced.

All three are growing steadily, even as the credit crisis deepens, because they are not exposed to the toxic assets and derivatives that have seen losses mount higher and higher, above $650bn (£415bn) at the latest count, among the conventional banks.

The European Islamic Investment Bank and the Islamic Bank of Britain – the two other British Islamic banks – are also expanding.

The IBB launched its first Islamic, or Sharia-compliant, residential mortgage in September, just as Lehman Brothers, one of Wall Street’s most renowned banks, collapsed under the weight of its credit exposure.

Humphrey Percy, chief executive of the Bank of London and Middle East, says: “We have not been affected to the same extent that the conventional banks have, although we have been indirectly impacted by the general lack of liquidity.”

Sultan Choudhary, commercial director of the Islamic Bank of Britain, adds: “We are still growing, not contracting. We never had the asset exposure in terms of the toxic assets that other banks have.”

As the City has been devastated by financial losses and job cuts, Islamic finance is a refreshing positive among the gloom for London, which has pioneered the growth of this sector in Europe and the west. Britain is the only country in the European Union that has established Islamic banks.

The Treasury is still planning to launch an Islamic bond, known as sukuk, even though this market is one area of the sector that has suffered in recent weeks as the slump in oil prices hits demand from the large pool of investors based in the oil-rich Middle East.

Principal Insurance, the UK’s first Islamic insurance company – and the first in western Europe – was also launched in May, providing Britain’s 2m Muslims with the opportunity of insuring their cars or houses in a Sharia-compliant way.

However, it is not just Muslims who are turning to Islamic finance, which has grown dramatically in the past eight years and is now worth an estimated $800bn globally. Many conventional companies are using it as an alternative because it offers an increasingly competitive way to raise money, while more non-Muslims are using Islamic mortgages and savings accounts.

The launch of an Islamic mortgage in September by the IBB, Britain’s only retail Islamic bank, was a significant development for the market as it was the first wholly-compliant Sharia home loan.

The other four Islamic banks, which are wholesale operations, are used by a growing number of companies and institutions, mostly based in Europe, which often see Islamic finance as a sensible way to diversify their business or portfolios.

John Weguelin, chief executive of the European Islamic Investment Bank, says: “What is important is that we are not leveraged and have not invested in toxic assets, unlike many of our mainstream competitors.

“This means Islamic banks are in a relatively strong position. I firmly believe that, in spite of the credit crisis, the prospects for Islamic finance remain positive.”

Copyright The Financial Times Limited 2008



Written by Suapi Shaffaii

November 10, 2008 at 11:24 am

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