Islamic mortgages moving into mainstream lending

2 August 2005

The UK Islamic mortgage market will grow by an average of 47% per year for the next four years, new research claims.

Datamonitor says as more lenders are realising the untapped potential of the Islamic market gross advances for house purchase could rise to £1.4bn by 2009.

It says the removal of double Stamp Duty on Shariah mortgages which had previously made them too expensive, has been partly responsible for mainstream lenders, such as HSBC and Lloyds TSB, coming into the market.

The report also claims this demonstrates belief in its growth potential and while still in its infancy Datamonitor predicts the market will continue to expand rapidly claiming it has seen growth of 68% every year since 2000. The current value of the Islamic mortgage market in terms of gross advances stands currently at £164m, says the research firm.

Until 2003 Ahli United Bank was the only player in the Islamic mortgage market. But since then there have been four more lenders enter the market. HSBC Amanah Finance and United National Bank both entered the market in 2003 while in 2004 Lloyds TSB and Aburaq Home Finance began offering Shariah mortgages.

But, the report warns, growth in the market is dependant on overcoming several regulatory obstacles as only one type of Shariah mortgage falls within the jurisdiction of the Financial Services Authority (FSA) This is known as an Ijara mortgage which sees the customer spread the payments for the property over a period of years while also paying the bank rent, and it is the lender that maintains legal ownership of the property until the loan is repaid, at which point the property passes ownership to the customer.

But another type of loan called a Murabaha plan sees the lender buy the property on behalf of the customer who then pays back the loan. Legal ownership is then transferred to the borrower once the loan in paid but it is transferred to the customer at its current, not original as under
the Ijara plan, value, which leaves the customer to repay the difference between the current value of the property and its original value.

Datamonitor claims the government intends to bring Murabaha plans into the regulated environment adding: "The next big hurdle is capital weighting. As financiers are required to provide a sufficient risk weighting or all lending products, it is important for Islamic mortgages to be on the same risk level as conventional mortgages. While conventional mortgages have a risk weighting of 50%, Ijara plans are still risk weighted at 100% therefore making Islamic mortgages more expensive to customers. Yet lenders are optimistic that this will change over the next few years. Once the risk weighting is lowered, lenders will be able to lower the pricing on Islamic mortgages."