44 Islamic Finance in Practice
large size of the Muslim population in the UK. The provision of these “home
purchase plan” options and other Islamic products and services has so far
led to significant growth ofthe Islamic finance industry in the country.
The UK government has introduced many legislative and regulatory
changes as part of its efforts to compact financial exclusion. The new laws
regarding “alternative finance” came as a result of realising the importance
of providing Muslims with financial products that is acceptable to their way
of life and its social and economicimpact on the community.
From a social perspective, there are estimated to be about two million
Muslims residing in the UK (3 per cent of the total UK population−the
largest ethnic minority faith group) with a further 0.5 million Muslim
visitors each year. The rationale therefore exists for social and financial
inclusion to accommodate this growing populationof Muslims.
From an economic perspective, the UK is one of the world’s largest capital
market centres, and the impressive global growth of Islamic finance at an
average of 15 per cent per annum over the last two decades means that there
is an economic imperative to establish this sector for inward investment
purposes. The UK is positioning itself as the global gateway to the Islamic
finance industry, which is worth approximately $400 billion currently but
predicted to grow to $4 trillion with London emerging as a global “hub” for
Islamic finance.Islamic home finance instruments
Islamic banking practitioners (with the help of Islamic scholars) have
utilized a number of instruments that are acceptable within Shari’a to offer
Islamic home finance products in a modern day economic system. In the UK,
the commonly used methods for the purchase of property areijara(lease)
with diminishingmusharaka(diminishing partnership) andmurabaha(a
sale transaction for costs plus profit). These instruments and their relevance
to the UK market are discussed in full below, in accordance with the current
practice in the UK market.
Conventional banks use interest-based loan contracts as the main
instruments to provide finance to their customers. As a result of interest
being prohibited by Islam, Islamic financial institutions cannot provide
traditional products and services, which involve interest based contracts.
Therefore, contemporary Islamic jurists and financial practitioners have
had to adopt and develop a number of instruments and facilities to allow
Islamic banks to operatean interest free system.
Islam does not deny that capital deserves to be rewarded, but Islamic
teachings present “risk sharing” finance as the most efficient and correct
way to provide finance. Therefore, an Islamic financial institution should
mainly use profit/loss sharing contracts on both sides of its balance sheet.
On the liabilities side, it invests depositors’ funds in various types of
businesses. A portion of the earned profit is paid to depositors in a pre-