The UK's Islamic mortgage market could today be worth as much as £9.2bn in balances outstanding, despite being worth just £0.04bn due to combination of factors that have served to suppress the market.
Information collected by independent market analyst Datamonitor suggests stamp duty tops a list of obstacles that have hampered the development of the mortgage market. Stamp duty can be paid twice on Islamic mortgage transactions, with the result that Islamic mortgage products are too expensive for many Muslims.
Conventional mortgage products are not strictly suitable for the UK's 1.8 million Muslim population as they are not compatible with Islamic (Sharia) law. Under Sharia law it is considered usury to pay or receive interest and as such it is necessary to design alternative mortgage products for practising Muslims.
At present the United Bank of Kuwait is the only provider in the UK to offer mortgage products that are compatible with Islamic law. However, many of the necessary design features also serve to make Muslim mortgages more expensive than traditional mortgage products.
This may be about to change if a delegation of leading bankers and Muslim representatives convinces the Government to change rules to make Muslim mortgages more affordable. If the Government does act, then Datamonitor believes that this will open up the market for Muslim mortgages, with the result that growth of this niche will shoot up.
Helen Smith, Datamonitor financial services analyst and author of the report, says: “If the barrier presented by Stamp Duty is removed then it is believed that this will open up the market to other players. Providers such as HSBC, Barclays and Yorkshire Building Society are all known to be interested in this market. Indeed, HSBC already has an Islamic mortgage product which has already been successfully launched in Malaysia and the US.
“If the impediment presented by Stamp Duty is removed and if economic conditions remain stable then Datamonitor forecasts that gross advances for Islamic mortgages will grow significantly over the next five years to reach £4.5bn by 2006, this compares to £267bn for the total mortgage market.”