Islamic finance in the UK

1. Islamic finance in the UK Presented by: Keith Leach Head of alburaq ABC International Bank plc

2. Presentation Summary • Introduction • The Government’s approach • Consumer banking products • Takafol • Commercial property finance • The future

3. 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

4. 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

5. 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

6. 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

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

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

9. 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

10. 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

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

12. 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

13. Muslims in the UK

14. 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)

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

19. Residential finance Financing techniques • Murabaha • Ijara • Diminishing Musharaka • Commodity Murabaha (Tawarruq)

20. 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

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

22. 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

23. Financing Models • Murabaha • Ijara • Commodity Muarabaha (Tawarruq) • Diminishing Musharaka • Parallel Istisna (development finance)

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

25. Issues for financiers • Property usage screening • Must be permissible activities • Potential contamination liabilities • Contaminated land • Asbestos • Other 3rd 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

26. 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

27. Islamic Finance in the UK Presented by: Keith Leach Head of alburaq ABC International Bank plc 23rd October 2007