Under Sharia law it is considered usury to pay or receive interest. Therefore, conventional mortgage products in the UK are not suitable for the practicing Muslim population. To remedy the situation a small number of banks are now offering Sharia compliant mortgages for the UK's 1.6 million Muslims, however, Bristol & West and ABC are the first to target the buy-to-let sector, which in itself has grown rapidly in recent years.
Bristol & West and ABC's buy-to-let offering works on the diminishing Musharaka model - a form of Ijara finance. Under this finance plan the customer chooses the property and agrees a price with the vendor in the normal way. The property is then purchased by the financier, and is leased back to the customer, who in turn sub-lets it to the tenant. Legal ownership in the property is shared, although the lender reduces its equity in the property over the period of the agreement until ownership is transferred to the customer.
Though still very small, the Islamic mortgage market has come a long way from its inception in 1997. A number of new entrants to the market, including high street banks HSBC and Lloyds TSB, and favorable regulatory amendments, notably the abolition of double stamp duty on Islamic mortgages in December 2003, have helped push the market forwards in recent years.
Indeed, according to Datamonitor's estimates, the Islamic mortgage market was worth GBP164 million in 2004 and has grown at almost 70% per year over the past five years. By 2009 it is expected to have grown to GBP1.4 billion.
However, for the market to reach its full potential, lenders must still face a number of challenges, not least that many Muslims remain unaware that the products exist, let alone that they are affordable. For success, providers therefore need to promote their products and develop education programs within Muslim communities.