Islamic Bank of Britain plc ( IBB ), (www.islamic-bank.com) last week held an exclusive event, entitled Islamic Finance Question Time. The event, held on 23rdApril 2012, was an open, public Q&A session hosted by the Bank’s Sharia Scholars. Islamic Finance Question Time is the first event of its kind, and the only time a UK Islamic bank has given public access to the Sharia Scholars that form its Sharia Supervisory Committee (SSC).
Nizam Muhammed Saleh Yaqoobi, and Mufti Abdul Qadir Barkatulla. The SSC welcomed questions from the public about Islamic Finance in order to facilitate a lively debate. The aim of the event was to demystify Islamic finance and provide an insight into how it offers a faith-based alternative to conventional finance and banking.
Commenting on the event, Chairman of the IBB SSC, Sheikh Dr Abdul Sattar Abu Ghuddah said, “Islamic finance is as old as the religion of Islam itself. However, there is still a lot of misunderstanding around how it works and the need for Muslims to manage their finances in Sharia compliant manner. The IBB SSC hopes the Islamic Finance Question Time event has shed some light on the matter and gone some way to encouraging the further take-up of Sharia Finance amongst the Muslim community.”
Samir Alamad, Senior Manager, Sharia Compliance at IBB who works closely with the IBB SSC on a day to day basis, also commented, “The feedback from attendees of Islamic Finance Question Time has been very positive. The public welcomed the opportunity to engage with the IBB SSC so openly. The event is the first time a UK Islamic bank has given open access to its SSC, and this reflects the open and transparent way the Bank works with its customers.”
Over 150 guests attended the event, held at the Bloomsbury Hotel in London. Over 10 questions were put to the panel leading to a debate lasting over 1.5 hours. Of these questions, the following generated a lively and informed discussion amongst the panel and their guests:
Q1 Why don’t you use the rental market rate for your Home Purchase Plan product?
Islamic banks use BBR or LIBOR to price their products as these are the most accurate, widely accepted and consistent benchmarks for financing. This allows Islamic banks to meet the important Sharia criteria of avoiding uncertainty. If rental rates were to be used as a benchmark instead, there would be too much variation. Not only would this go against the Sharia it would also be more costly for the customer. Rental rates fluctuate across a wide spectrum depending on location, condition of the property and other aspects, e.g. rent charged for a property in London would be three or four times more expensive than a similar property in the North. Hence, the Islamic bank would end up offering many various rental rates which would not be practical. The customer would also be disadvantaged by having to pay more if the rental rate was to be used as a benchmark.
Importantly, basing the rental rates of HPPs on benchmarks such as LIBOR or BBR does not affect the actual contracts that the product is based on. The rent or lease agreement are not rendered Haram, or not compliant with Sharia. Established benchmarks such as BBR and LIBOR therefore play an important role. They allow the Bank to meet the Sharia requirements for a benchmark that is widely accepted, consistent, transparent and reliable which in turns eliminates any uncertainty around pricing.
An Islamic benchmark is currently being developed and this is a great step forward for the industry. Once established it will eliminate the confusion that exists over the use of BBR or LIBOR, as explained above.
Q2 Is it permissible under the Sharia to quote a profit rate for Fixed Term Deposit savings accounts?
It is important to clarify that this Sharia compliant savings product(s) is called ‘Fixed Term’ and not ‘fixed return’. It is usually offered under the Islamic principle of Wakala (an agency agreement). With this product, the Islamic bank provides an expected profit rate over a set period of time as a ‘target’ based on the investment activity it will undertake with the deposits. The ‘Fixed’ element relates to the length of time the bank will undertake the investment activity for the customer. For example, two years for the Two Year Fixed Term Deposit Account.
These savings products do not offer a fixed return, in the same way that conventional banks that pay interest, do. Under Sharia, the bank cannot guarantee a rate of return, because with investment there is always an element of risk.
However, Islamic banks mitigate this risk for the customer in many ways, so that the customer’s deposits and return do not suffer. Essentially, the bank monitors the investment activity, and its performance, very closely. If, at any time, it looks likely that the customer’s return may be less than the expected profit rate the bank will contact the client and offer them the option to close the account and take back the full deposit amount and the profit accrued up to that date. Alternatively, the customer can choose to carry on till the end of the term on the lower expected profit rate from that point.
This process is all in accordance with Sharia which encourages trade, and forbids Riba. Sharia also mandates that risk is part of all transactions and that these risks are managed responsibly to ensure the best possible outcome for all parties.
IBB is the UK’s only wholly Sharia compliant retail bank in the UK. It was formed in 2004 and has attracted over 50, 000 customers. The Bank offers the largest range of Sharia compliant retail financial products in the UK and these include current, savings and business banking accounts, Home Purchase Plans and Buy to Let Purchase Plans. IBB also works with carefully selected partners to offer Sharia compliant wealth management products and services.
In order to guarantee that the products and services from IBB are genuinely Sharia compliant, IBB has in place a panel of respected Sharia Scholars, called the Sharia Supervisory Committee (SSC). Their work is supported by a dedicated a Sharia Compliance Officer (SCO). Both the SCO and the SSC are trained experts in the interpretation of Islamic law and its application within modern day Islamic financial institutions. They both review every product and aspect of IBB ‘s business operations to ensure that Sharia compliance is always maintained.
About Islamic Bank of Britain
Islamic Bank of Britain plc (Bank) has pioneered Sharia compliant retail banking in the UK and has launched a wide range of products, including the Home Purchase Plan (the halal mortgage alternative) Current Accounts and Savings Accounts. The Bank was also the first to introduce Sharia compliant business banking to the UK, and now offers a wide range of institutional and business banking products and services, including Commercial Property Finance.
Several of the Bank’s products remain unique in the UK retail market.
The Bank is authorised and regulated by the Financial Services Authority and is a member of Financial Services Compensation Scheme. All products offered by the Bank are fully approved by the Bank’s Sharia Supervisory Committee (SSC).
Sharia compliant banking operates without the use of interest. The products that are offered are structured in a different way to those provided by conventional banks
Whilst the Bank offers products and services that are designed in accordance with Sharia principles, it is an inclusive Bank and welcomes customers of all faiths.
Interviews with Islamic Bank of Britain are available on request.