‘Islamic’ finance. Will it ever take off?

The current landscape of financial products can be overwhelming.  In today’s digitised, globalised economy, the ‘wealth’ (for want of a better word) of vocabulary alone is astonishing: ISAs; pensions; instant access savings; 120-day notice withdrawal accounts; relevant life cover; drawdown; flexible benefits…the list goes on.

Throw into this pool the antiquated terminology of an ancient language such as Arabic, as Islamic financial products currently do: Sukuk; Musharaka; takaful, and you might want to hold on to a life jacket to prevent yourself from drowning.

The challenge is to create and promote equitable and fairly priced services and products to the entire community and not simply a segment of it. To not do this, the Islamic finance industry risks creating a fledgeling parallel economy with further segregated communities no matter the strength of its intellectual and supposedly moral foundation. No doubt, dropping classical Arabic centric labels will go some way in fomenting positive inquiry from all sections of the society. But, it’s more than dealing with the Arabic lexicon.

London is the largest Islamic finance centre outside of the Muslim World, and it is only due  to the UK’s need and want to attract wealthy middle eastern private, institutional and sovereign investments.

It is, however, questionable whether there is a profitable domestic market for products targeted solely to Muslims.  Consider the fact that only 20% of Muslims are economically active in comparison to the national average of 35%,  and the fact that a whopping 46% reside in some  of the most deprived areas in England it’s highly unlikely such a demographic is likely to be able to invest any surplus wealth if they even have any or whether much of that market can afford the higher monthly payments associated with ‘shariah’ compliant home purchase plans.

Add to these facts that not all those who identify as Muslims are practising, and even if they are, they raise legitimate criticisms about just how ‘islamic’ the mortgage equivalent offered by the Islamic finance industry actually is, simply because it looks like a more expensive form of an interest-based product with conventional terms substituted for Arabic ones that give the illusion of religious legitimacy.

In such a context, can Islamic finance move away from being on the periphery where it currently is?

I do not believe ‘Islamic’ finance be it to do with mortgages or investments should be targeted to a single religious and cultural demographic and nor do I believe ‘Islamic’ finance should be modelled to fit within a corporate economic landscape that is not based on faith-based values, but rather profit, profit, profit at the institutions lowest marginal risk.

Islamic finance has not been able to take off as originally anticipated because of the four reasons that I’ve alluded to, but to surmise:

  1. The Language – unnecessary use of a foreign language that even Muslims get confused with and professionals need to take additional training to simply be able to adequately advise on them
  2. The Marketing – Targeting only a Muslim customer base
  3. The Market – Targeting a demography that simply cannot afford to invest, or cannot afford the higher finance payments
  4. The Product – When it comes to home finance, it simply doesn’t feel faith-based nor does it feel different to a conventional mortgage.

The Islamic economic model is based on the concept of sharing both risk and reward. In the context of home buying, it should be simple, the entity with the cash helps the person without the cash to buy a home, in return for which the person who occupies the property pays the financier who is not residing in the property a proportionate rent. The person residing (the co-owner) in the property has the option to purchase additional shares as and when he or she can afford to do so, thereby reducing their rental payments. The financier can sell shares at market price or for the sake of its own liquidity can choose to sell those shares at discount to attract their co-owners to make additional acquisition payments.

This is not what happens with today’s home purchase plans, first of all, despite such plans being referred to as partnerships, it doesn’t feel like a partnership as the risk remains on the co-owner residing in the property as they have to bear the costs of the building insurance, and they also have to repay the financiers portion in the event of a sale at below the level of the outstanding finance.

Then there’s the issue of the rental payment made to the financier, it’s not based on market rent but rather benchmarked against the bank base rate. This is done to keep the cost of the finance the same for all regardless of where you may be in the country, and on the face of it, it looks reasonable, but is it?

The average rent for a 3-bedroom property in Nottingham is £840 per month, the average price of such a property is £200,000.

If you were to take out a fixed 80% Al Rayan FTV (Finance to Value) product on such a property you’d have £160,000 on finance for which you’d pay £800.14 per month in monthly ‘rent’ over a 25-year period.

Now, if the same property was financed on a true partnership-based model, the co-owner would only pay 80% of the market rent, which would be only £672.

The surplus monies could be used to buy further shares in the property. When the property is sold, the financier benefits proportionately from the equity growth too, as they should as true partners, unlike what happens with the current ‘diminishing musharaka’ contract.

Of course, ‘diminishing musharaka’ could quite easily have been called ‘diminishing partnership’ but as things stand it doesn’t feel like there’s any more of a partnership than what one would have with the Halifax.

So, what next for Islamic finance? Maybe that’s not the question we should be asking but rather what’s needed for a just economy that looks at market opportunities not for the sake of profit but for the sake of solving a problem. Blessings would no doubt follow for all, says the theist.


Mohammad Uz-Zaman is the Director of ADL Estate Planning Ltd and ADL Wealth Ltd. He is a private client wealth manager who holds accreditations across regulated financial advice and estate planning. He holds a BSc (Hons) in Psychology & Sociology and an MA in Islamic Studies in addition to various professional qualifications.

Shaping finance through shariah: a layman’s observation

Faith and finance could not be any more dichotomous today, yet the UK is the leading western country and Europe’s premier centre for Islamic finance with US$19 BLN of reported assets.

London lawyers have evolved skills and experience to become well versed in shariah-compliant contract law as well as financial instruments in order to service the growing appetite for shariah-compliant investments from Middle Eastern investors who believe the UK to be a judicious and profitable place for investment; our accountancy and banking sectors have similarly adapted to this growing and profitable emerging market. Couple this with the need for foreign investment into the UK’s major national infrastructure projects for the next 20 years we can be certain that because of our national economic interests, the UK offers a profitable and most importantly a potentially halal enterprise for our market evolving a service provision for the religiously conscious wealthy foreign investor.

However, ironically, Islamic finance has yet to take off amongst the UK’s 2.7 million Muslims and this is largely due to the fact that UK consumers approach Islamic finance as a debtor whereas foreign consumers tend to be creditors or investors. This has a significant impact on how you relate to the current modus operandi and structure of Islamic finance. For instance as a creditor, be you a stock and shares investor or a current account holder, you can be confident that your money is invested in a shariah complaint manner which is similar to conventional ethical funds that screen investments to ensure your monies are not invested in what are known as vice investments e.g. funds that invest alcohol, tobacco, munitions, gambling etc related stock. Furthermore, for investors in shariah-compliant funds, there are added considerations to ensure where interest cannot be ignored that interest is siphoned off and donated to charitable causes. Another interesting criterion for shariah-compliant funds is that they will not include companies which generally carry more than 30% debt.

So to summarise the three key principles for shariah compliance are 1. There should be no interest or riba which means an increase on the capital 2. Not investing in vice funds and 3. Not investing in companies that are in significant debt. However, all these principles are secondary to the fundamentals of ideal human conduct which should be based on equity and mercy.

Our global political system has become incredibly connected through the membership of a whole host of international organisations be it the World Trade Organisation or the becoming of federal alliances like the EU and also cooperative alliances between a select group of countries such as the G7. Naturally, the world utilises the banking systems of nation states which when enters into the arena of international trade they are also governed by what is known as the Basel Accords which proffer guidance to regulate the global banking industry.

The implication of a well-connected economic system tends to create fluidity in markets meaning fewer barriers in the movement of people, products and services in order to encourage economic prosperity meaning more jobs, innovation and entrepreneurship. However, for the sake of ‘economic prosperity’ we seek to encourage the deregulation of markets, create and loan money that literally does not exist and then are legally allowed pursue the debtor. As we have deregulated markets we have unwittingly ‘deregulated ethics’ allowing companies to freely promote a culture not based on moral values but one based on maximising our consumption, at the lowest possible cost, at the highest margins with total disregard for the net societal interest.

As we have mastered the exploitation of our own markets our businesses encroach on politically weak and less technologically sophisticated cultures and communities, where the goal is rarely philanthropic but rather to open markets for the purpose of profit regardless of the consequence on the host society.

Therefore, in an age of profit and a failure of theology of sorts, Islam has begun to offer a strong alternative to the conventional approach to profit and investment. Having proven its resilience before and after the global crisis in 2008, as evidenced by the IMF, the future for shariah inspired principles for the growing socially conscious investor and the risk mitigating fund manager who opt to invest in shariah compliant funds will offer a powerful economic challenge to riskier vice enterprises that although may be profitable on the balance sheet remain incredibly costly to our societies.


Mohammad Uz-Zaman BSc (Hons) MA, DipFA is the Director of ADL Estate Planning Ltd and ADL Wealth Ltd. He is a private client wealth manager who holds accreditations across regulated financial advice and estate planning. He holds a BSc (Hons) in Psychology & Sociology and an MA in Islamic Studies in addition to various professional qualifications. He is also an affiliate member of STEP (Society of Trust & Estate Practioners)

Islamic Wills – Visited

According to Islamic law, when a husband dies, his wife inherits one eighth of his estate. Should the wife want to benefit from the remainder of her late husband’s estate, she needs the permission of the surviving Islamic inheritors. These other inheritors could be, for instance, the mother-in-law, father-in-law and all of the late husband’s children. It is likely that these inheritors have never been told they need to give said permission, but the widow must seek it nonetheless. If, for instance, she is seeking permission to benefit from a property to which the inheritors have a claim, the widow would effectively need to pay them rent for the duration of her residence there.

Similarly, if a wife dies, her husband inherits a quarter of her estate. If that husband should want to benefit from the remainder of his late wife’s estate, he would also need to seek permission from the surviving Islamic inheritors and pay them rent to reflect their foregone portions. All of the above can happen pretty simply for straightforward estates. The net result, however, is a complicated one in order to manage the entire process. Not to mention more expensive in the medium to long term as well.

There are a number of situations that ‘Islamic’ estate planning and ‘Islamic’ wills do not deal with directly. For example, such setups do not account for leaving additional wealth to a disabled beneficiary; they do not protect wealth from third-party threats or allow for optimum intergenerational planning. Given that estates rarely have to deal with inheritance tax alone, they also fail to address how to optimise the structuring of an estate from a taxation point of view.

Most importantly, this type of estate planning does not reflect the changing roles and pressures of men and women today, in contrast to even 100 years ago let alone 1400 years ago. For instance, a daughter may share a far greater responsibility in looking after her elderly parents. It is also unlikely that her brother or uncle would provide for her practically should she remain unmarried, become divorced, or even widowed. Arguably, most of these latter issues are contemporary and contextual ones, and therefore not necessarily dealt with by classical Islamic jurisprudence.

To compound the situation further, sometimes a client’s investment property that he says he owns is in fact owned by his wife. If this property is mortgaged, then there is often an additional outstanding loan that was once provided by an uncle, brother or friend, who subsequently has an unofficial equitable stake in the growth of the property. So, you then need to explain to your client that this relative’s ‘loan’ is not actually a loan, but rather it is treated as a partnership share in the property. Things can get complicated.

Or, say for instance you are dealing with a business owner who may be listed as the sole director and shareholder of his company. This client tells you however that he has multiple silent business partners who have decided that they actively don’t want to be listed as shareholders. Of course, if the business collapses, these silent partners would not be at risk if creditors came knocking on the door. However, in the good times they would still expect to be remunerated as equally as the listed shareholder/Partner/Director on the profits and on any future sale of the business. On the other hand, should the shares of the legal business owners be sold, these silent partners have no recourse.

Then there’s the potential estate planning surrounding a second ‘wife’. Without offering any personal judgment, you can probably appreciate from an estate planning point of view that this ramps up the possible complications. I’m not complaining of course. More complications, means more fee-earning, but it’s eye-opening to be in the company of people from all levels of society and to realise that everyone’s life is quite exceptional to them.

There’s no doubt that there needs to be a lot more conversation and study between scholars of Islamic jurisprudence and professionals specialising in estate planning or wealth management. I personally cannot see how ‘Islamic’ inheritance laws as they are currently practiced can be true to shariah in a 21st century British context. Rather, as they stand these laws may well create more societal problems than solve them. Let’s also remind ourselves that there are a total of six classes of potential beneficiaries who can challenge the distribution of an estate. What if one of those classes has a different jurisprudential position to the deceased?

Consider, for example, the average Muslim family with a couple of kids. With assets that are largely made up of a residential property valued in the region of £500,000, they can literally benefit multiple future generations with effective conventional estate planning solutions. They would benefit from the recycling of wealth, which can help them pay for better education, debt relief, setting up a business and much more. Alternative ‘Islamic’ solutions may not do the same.

The British Muslim spending power is estimated to be worth £20.5 billion annually. British Muslims are the top online charity givers and the 13,400 Muslim owned businesses in London alone have created more than 70,000 jobs. Now, it’s time to get smart. Get professional advice on how to structure businesses or investments sensibly and legally, and put in place asset protection strategies that can benefit generations to come.


Mohammad Uz-Zaman is the Director of ADL Estate Planning Ltd. He is a private client estate planning consultant who holds accreditations across regulated financial advice and estate planning. He holds a BSc (Hons) in Psychology & Sociology and an MA in Islamic Studies and is also an Associate Member of the Society of Trust and Estate Practitioners (STEP).