U.K. Shariah Asset Growth Curbed by Recession: Islamic Finance

(Bloomberg) — Growth in Islamic financing in the U.K. has been hampered by an economic slump and what Moody’s Investors Service describes as a lack of government support.

HSBC Amanah, a unit of Europe’s biggest bank, says Malaysia and the Middle East have better growth prospects. Lloyds Banking Group Plc, the U.K.’s largest mortgage lender, stopped offering home financing that complies with Shariah law because the overseas underwriter withdrew, Emile Abu-Shakra, a spokesman at the bank in London, said in an interview yesterday. The Birmingham-based Islamic Bank of Britain said income from Islamic transactions dropped to 3 million pounds ($4.6 million) last year, from 8 million pounds in 2008.

Growth in the industry in the U.K., Europe’s largest market for products complying with the religion’s ban on interest, has been hurt by a lack of regulations, according to Moody’s. The U.K. Treasury yesterday reiterated the previous government’s 2008 position that a sovereign sukuk sale, which would provide a benchmark for issuance, didn’t offer “value for money.”

“Most of the Islamic offerings are simply not competitive compared to their conventional counterparts,” Ahmad Alanani, an associate director for the Middle East and North Africa at Exotix Ltd. in London, an investment bank specializing in illiquid securities, said in an interview on July 7. “They have failed to achieve the mass appeal it was hoped they would.”

‘Challenging’ Environment

HSBC, Lloyds and IBB are among 22 lenders competing for a share of the U.K.’s $19 billion of Islamic assets, according to International Financial Services London, which promotes the nation’s financial industry overseas. That compares with $93 billion in Malaysia, almost 20 percent of the country’s total.

The U.K. Islamic mortgage market amounts to 500 million pounds, 0.3 percent of total home loans, International Financial Services said in a January report. To comply with the religion’s ban on interest, Shariah-qualified banks buy property on behalf of the borrower and resell it back at a profit, with repayments typically made in installments.

IBB’s losses increased 61 percent in 2009, “impacted by the challenging economic environment,” Chairman Mohsen Moustafa wrote in the company’s annual report. HSBC Amanah’s Chief Executive Officer Mukhtar Hussain cited a “very difficult” period for the U.K. Islamic market, in a June 29 interview in Kuala Lumpur.

Sukuk Returns

Global sales of Islamic bonds have fallen 29 percent to $6.62 billion from the same period last year, according to data compiled by Bloomberg. Sukuk issuance rose to a record in 2007.

The yield on Malaysia’s 3.928 percent Islamic notes due June 2015 fell five basis points to 3.11 percent as of 5:40 p.m. in Singapore, the lowest level since the bonds were sold on May 27, according to prices from Royal Bank of Scotland Group Plc. The difference over similar-maturity U.S. Treasuries has narrowed to 149 basis points from 180 since then.

Islamic bonds returned 7 percent so far this year, according to the HSBC/NASDAQ Dubai US Dollar Sukuk Index, while regular debt in developing markets gained 8 percent, JPMorgan Chase & Co.’s EMBI Global Diversified Index shows.

Emerging-market sukuk yielded an average 430 basis points more than the London interbank offered rate yesterday, having narrowed by 37 basis points, or 0.37 percentage point, so far this year, according to the HSBC/NASDAQ data.

‘Difficult Time’

Shariah-compliant loans in Europe, the Middle East and Africa dropped 35 percent so far in 2010 to $2.32 billion, the lowest level in five years, according to data compiled by Bloomberg. Islamic bank loans in Malaysia, the world’s biggest market for sukuk, more than doubled to a two-year high of $4.1 billion in the first half of this year.

“The U.K. is going through a very difficult time right now and the environment is much more challenging, hence, our focus is on the Middle East and Malaysia because we think that those markets have better growth prospects,” HSBC Amanah’s Hussain said. “We haven’t scaled down” our U.K. operations, he said.

HSBC Amanah was set up a decade ago and offers housing finance. The lender has 28,000 bank account customers and extended 800 million pounds of loans for Islamic mortgages since 2003, according to a statement from spokesman James Thorpe.

Lloyds started Islamic banking operations in 2006 and is committed to its customers, the bank’s spokesman Emile said, adding that the lender had seen 70 percent growth in Shariah accounts allowing instant access over the last two years.

‘Botched Attempt’

“HSBC and Lloyds had made a botched attempt at this segment by initially offering a variety of Shariah compliant products, which they have since failed to market successfully,” Alanani at Exotix said on July 7.

The Islamic Bank of Britain has provided mortgages, loans and retail services through its eight branches since 2004 to cater to the U.K.’s 1.8 million Muslims. While clients rose 6 percent to 50,000 and deposits climbed 18 percent to 186.6 million pounds last year, its business slumped during the recession, according to its latest annual report.

IBB’s loss last year widened to 9.49 million pounds, from 5.9 million pounds. The bank’s shares last traded at 3.75 pounds on July 19, down 48 percent from the year’s peak of 7.25 pounds on Jan. 7. The lender declined a request for an interview.

More regulatory and legislative development needs to be done to encourage the establishment and marketing of Shariah- compliant investments, Faisal Hijazi, the business development manager of rating services and Islamic finance at Moody’s in Dubai, said in a July 1 interview in Kuala Lumpur.

“I can understand the frustration” of the industry players in the U.K., Hijazi said. “The product availability is still limited, and the scale of the product is still limited.”

The U.K. government introduced tax concessions for Islamic bonds in its annual budget in 2007 and authorities extended tax breaks to Islamic mortgages in 2003.

“A lot of people would have said five years ago the U.K. was going to be the next big market,” said Hussain of HSBC Amanah. “I don’t think that’s the case.”

–Editors: Simon Harvey, Shanthy Nambiar

source : business week