Muslims torn between belief and finance

Iqbal Khan, who holds global responsibility for Islamic finance within HSBC, is a man on a mission. He recognises that British Muslims have very strong and often distinct financial needs, but accepts that neither HSBC nor the UK's financial institutions has done anything like enough to meet them.

'There is a need to integrate British Muslims into mainstream financial services,' he says.

And he is determined to play his part. But until that happens, many of the UK's 1.5 million Muslims will remain torn between the practical necessities of economic life, and their traditional Islamic beliefs.

Although not all British Muslims take the same view, many do have fundamental religious objections to the basic principles on which British financial products, services, and indeed, institutions, are based.

Although most of us take the idea of interest for granted, many Muslims regard it as money earned on money and therefore not fairly earned. But it does not stop there. To varying degrees, depending on their interpretation of and adherence to Islamic law (Sharia), Muslims also have concerns about any form of insurance that is not strictly mutual. As a result, British Muslims often avoid any contact with banks, insurance companies and building societies, or if they do have dealings with them, they do so only with extreme reluctance.

Abdullah, an accountant from London, has gone to extraordinary lengths to straddle the divide between the secular financial world and his religious beliefs. 'I have a no-interest bank account, which I arranged specially with Barclays,' he says. But that is only the beginning of the financial sacrifices he is prepared to make. Instead of taking out a mortgage, he pays £12,000 a year rent (but would pay double), and buys a new car every two years in order to take advantage of the free insurance offered by dealers. And he is looking for another job.

So why give himself so much grief? 'I never give or take interest, because it is in the Koran, and because our prophet addressed the issue and made it sinful,' he says.

Not surprisingly, Abdullah says he finds it difficult to live in an 'interest-based' society. But for the sake of short-term financial gain 'I am not going to compromise', he says.

Richard Thomas of the Arab Banking Corporation says: 'Most British Muslims would prefer to use an Islamic system.' But because British financial institutions have not woken up to Muslims' specific needs, he says , 'a large proportion of Muslims pay rent, don't have bank accounts, and don't participate fully in the mainstream economy'. The Government's social exclusion unit confirmed this last year, he adds: 'It discovered that Muslims are one of the most disadvantaged groups in the community when it comes to access to financial services.'

Abdul Malik from east London says: 'The majority are doing their best to live in the Islamic way, but it is difficult because they don't have any real choice.' He has a credit card, pays it off as soon as possible, but admits a strict Muslim wouldn't have one. Yet when buying a car, he always pays cash rather than taking out a conventional loan with interest. 'I don't compromise on little things like that,' he says.

And even his family who, he admits, are not as strict as he is, 'didn't buy a £220,000 house in north London, because they couldn't buy it in the Islamic way'. Malik says that despite their misgivings, the majority of Muslims are forced to go to a British bank. 'Either that, or keep money under the mattress,' he says.

However, according to Nasr-Eldin Ayoub-Bey of the Institute of Islamic Banking and Insurance, many British Muslims have happily adopted western views: 'As with other religions, being a Muslim doesn't automatically make you pious.'.

Nihal, from Ealing, has lived in the UK for 20 years. Originally from the Middle East, she has a mortgage, a bank account, and counts her family as practising Muslims. 'These things aren't an issue,' she says. And although she admits 'it's a sensitive subject', when it comes to financial matters, she adopts a pragmatic approach. 'It is impossible to carry out all the Sharia requirements,' she says. And even if alternatives more in keeping with Sharia were available, she says she wouldn't adopt them.

The Islamic Investment Banking Unit (IIBU) is one organisation that has identified demand among British Muslims for financial products which adhere to strict Islamic principles. Part of the United Bank of Kuwait, it has been providing British Muslims with home finance according to Sharia law since 1997.

'There are 2,600 ways to buy a house in the UK, but only two ways to do so in Sharia. And we offer both,' says Clive Beacham, IIBU's financial products manager. These have been approved by the IIBU's scholars, who must decide whether a product is halal (acceptable) or haram (forbidden) before it can be launched.

Beacham says the essential difference between conventional mortgages and IIBU's financing arrangements stems from Islam's abhorrence of usury - charging money on money. So whereas with a mortgage, the lender advances funds to the borrower, and charges interest for the use of that money, Sharia financing avoids anything to do with interest. And, says Beacham: 'Though it took longer to make it work in the UK, there are many advantages for the customer.'

Beacham explains how the plans work: 'With the Murabaha plan, the customer gives us a down payment of up to 20 per cent, we buy the property and sell it back to the customer at a profit.' A fixed- term deal of 15 years, with the overall amount to be paid and the monthly instalments known right at the start, he describes it as 'elegant and simple'.

The other method, known as Ijara, is based on leasing and a promise to buy.

Beacham says that the company is feeling its way towards developing other financial products, but admits that in a banking environment where the rules are not written with you in mind, progress is difficult.

But if and when IIBU launches any new products, it is likely to face stiff competition. Iqbal Khan says: 'HSBC is looking at launching a Sharia-compliant global equity fund, and is also considering other products on the retail side.'

Other banks, such as Barclays and Citibank, already have their own Islamic banking units. However, despite such initiatives, and others internationally such as the Dow Jones Islamic Index in the US, progress is unlikely to be straightforward.

Khan says that the speed at which products can be brought in 'depends on the regulatory environment': products such as the equity fund can come on stream sooner than others, such as home finance. However, he says: 'The FSA [Financial Service Authority] has been positive, and we are hopeful.'

Whether or not it will offer Muslims a real alternative, Khan seems determined, at the very least, to widen the choices available. 'The third or fourth generation of Muslims deserve the chance to choose in the same way that people can now choose ethical or environmentally-friendly financial products,' he says.

And whatever their beliefs, most people will say amin to that.