Managing my financial journey
Managing my financial journey

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Managing my financial journey

3.1.4 Islamic finance – a growing market in the UK

When looking at ways that money can be borrowed, we also need to look at the concept of Islamic finance. Internationally this is now the fastest growing financial sector.

In the UK at the end of 2014 there were 22 firms that offered financial products that complied with Islamic Sharia Law. These included six fully fledged Islamic banks including the Bank of London and Gatehouse Bank. Collectively the firms held an estimated total of $19 billion of assets (Reuters, 2014).

To learn more about this growing market, first read the description below about how Islamic home finance works, then watch the video on the growing Islamic bond market.

Islamic home finance

Islamic home finance is based on the Islamic finance principles of Ijara (lease agreement) and Diminishing Musharaka (equity participation). You make two contracts with the bank. In this scheme, the bank and you jointly own the property, although the title deeds will be in the bank’s name. You will then buy back the bank’s share over a number of years. During that period, the bank will charge you rent for living in the property on the percentage of shares it has. With each payment, your share of the property increases, while the bank’s percentage decreases. At the end of the term, the bank will transfer the title deeds of the property into your name.

Download this video clip.Video player: ou_futurelearn_managing_my_journey_vid_1072.mp4
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Hello, and welcome back. Now, throughout history, the City of London has always been a global trading post, the centre of financial wheeling and dealing since it was founded 2,000 years ago. And the British Prime Minister, David Cameron, has just announced plans to open up this square mile to Islamic financing.
He wants the UK to become the first non-Muslim country to issue an Islamic bond and hopes the London Stock Exchange will start a new Islamic index within a year, and here's why. In the last six years, global Islamic investments have soared by 150 per cent. By next year, they're expected to be worth around two trillion dollars, and Britain wants a piece of that pie.
The Treasury is working on an Islamic bond, or sukuk, that conforms to Sharia law, which could be worth around 320 million dollars. David Cameron made the announcement at the World Islamic Economic Forum in London, the first time the event has been held outside the Muslim world in its seven-year history.
Never again should a Muslim in Britain feel unable to go to university because they cannot get a student loan simply because of their religion.


Never again should a Muslim in Britain feel unable to go to start a business because they can't get a start-up loan simply because of their religion. The message is simple.


The message, I believe, is very simple. Britain is a country ready to welcome your investment, a country that values your friendship, and a country that will never exclude anyone because of their race, their religion, their colour, or their creed.
David Cameron. Well, joining me from Bristol now is Jeremy Williams. He is managing director of Handshaikh, and that's a British company promoting business links with Gulf States. He's also written a book called Don't They Know It's Friday? Jeremy Williams, very good to talk to you. Thank you very much indeed for being with us. First of all, what do you think of this idea of Britain getting involved in this particular way?
Well, I think it's an excellent idea and long overdue. I mean, as the Prime Minister's just been saying, this is a fantastic opportunity. I mean, there are restrictions on Sharia law in terms of Islamic finance, but these are based around the concept of decency. I mean, you're not supposed to invest or have products which are dealing with bad things like drugs, pornography, gambling, and so on. But I mean, overall, I think it's fantastic.
But there is this thing. Can you explain simply what an Islamic bond is and how it is different, say, from a normal bond?
Well, the essence of Sharia law in terms of finance is that interest paid is haram, it is forbidden. And therefore, you construct ... and the Quran is quite clear on these things. Although I'm a Christian, I'm telling you things that Muslims tell me ... that you construct the use of finance in a way that is decent and honourable as I've just been saying.
And this is the whole encompassing of what has been offered today, that it can be used for projects which are decent and of good value. That's the whole thing. There's nothing particularly complicated about it.
I mean, the essence of it is that Riba, interest, is forbidden because money should express what someone is doing. It should express some effort. So just having money and putting it in a bank and getting more money for doing nothing flies in the face of Sharia law in terms of finance.
And in terms of the business that you do, how difficult has it been to adapt to kind of those sort of Sharia conditions, as it were?
Well, I mean, not at all. I was talking to someone in Dubai a short time ago, and they have Sharia-compliant mortgages to buy property in Dubai and throughout the Gulf countries.
So I mean, many Westerners ... this is not a matter of just Islam. A Westerner can buy this bond and participate in it just the same as a Muslim. This is not Muslim-only stuff. This is for everybody. And as I've just said, the expatriates up and down the Gulf use, as it were, a Sharia-compliant mortgage.
OK. Well, explain that to me. Because as I understand it, I get a mortgage. I borrow, I don't know, 300,000 dollars from my bank. And my bank says to me, well, OK, you can have 300,000 dollars, but you're going to have to pay interest on that loan. Now, how would it be different if you have a Sharia mortgage?
Well, there are five types of finance, and they're in my book if you want to read it up. But I mean, in essence, the bank buys the house and sells it to you at an increased price. And the difference is not interest, it's just business. Someone bought something and sold it on at a higher price. But interest doesn't apply in this case.
Isn't that semantics? Or is that a real difference?
Eh, we could discuss that. Yes, it is. But I mean, Riba is haram, it is forbidden. So the concept of interest, of earning money by doing nothing, that's the key to it all.
OK Jeremy Williams, we have to leave it there and congratulations on getting that good plug in for your book! Thank you very much indeed.
Thank you.
Thank you very much.
End transcript
Interactive feature not available in single page view (see it in standard view).

The figure below shows how the arrangement works.

Described image
Figure 4 The Islamic system of home finance.

Step 1 – You make an initial payment to the bank of at least 10 per cent of the property value. You sign two contracts, the Diminishing Musharaka contract and the Ijara contract. You promise to purchase the remaining 90 per cent of the property over an agreed period and you agree to pay rent to the bank.

Step 2 – The bank contributes up to 90 per cent of the property value and buys the property on your behalf.

Step 3 – The property is then transferred to you from the seller.

Step 4 – The property deeds are transferred to the bank.

Step 5 – When you have purchased the property completely, the property deeds are transferred to you.


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