FSA Gives Support to Islamic Banks Bid
Byline: John Duckers
Britain's financial watchdog yesterday said it would welcome applications to set up a bank based on Islamic religious principles.
The Financial Services Authority said it had held talks on how such a bank could meet its regulations.
Speaking at a conference in Leicester on Islamic finance, Sir Howard Davies, chairman of the FSA, said there was a gap in the market for retail sector Islamic banking products, which would cater to nearly two million UK Muslims.
'I should emphasise that wehave not yet received a formal Islamic bank application, though we are aware of some interest in doing so,' he added.
The global market for Islamic banking and finance is estimated by analysts to be worth pounds 130 billion to pounds 325 billion and has been growing at 10-15 per cent per year, he noted.
But the US government has raised concern that Islamic financing methods can be used to channel funds for militant groups such as al Qaeda, which was widely blamed for the September 11 attacks on the United States.
As part of international efforts to prevent the financing of terror, the Group of Seven leading industrial are also looking at the role of Islamic banks and charities.
Sir Howard said Britain had an economic interest in ensuring a flourishing Islamic financial market, but the FSA would not treat applications from Islamic institutions differently from any other institution, now would it lower its supervisory standards.
'We would welcome a soundly financed and prudently managed Islamic financial institution in this country, which would be good for Muslim customers, good for innovation and diversity in our markets and good for London as an international financial centre,' Sir Howard said.
There are approximately 1.8 million Muslims permanently resident in the UK with estimated savings of around pounds 1 billion, while over half a million Muslims visited Britain last year, spending nearly pounds 600 million.
'So the potential market, whether for savings products, borrowing, or simply transaction related finance is very large,' Sir Howard said.
Many devout Muslims do not save in conventional banks because they regard fixed interest payments as usurious. Usury is forbidden by Islamic religious law.
There are no purely Islamic banks in the UK at present, though London is an important centre for Islamic financial products and some banks, like HSBC, have windows dedicated to Islamic customers.
The FSA said it would apply its main objectives - which include reducing financial crime and protecting consumers of financial services - to an Islamic bank as stringently as to western institutions.
But it also said there was room to accommodate some of the differences between Islamic and western banks, such as greater risks borne by Islamic investors compared with their western counterparts.
The watchdog added that more work was needed to reduce some of the discrepancies involving Islamic mortgages.
Islamic mortgages in the UK currently attract stamp duty, a tax on property purchases, twice - once when a lender buys a property and once when it is transferred to the mortgage holder.
Also, the Basel Accord, which sets global rules on banking supervision, requires a bank to carry twice as much capital for an Islamic mortgage as for a conventional, western mortgage.
However, the new Basel Accord, known as Basel II, would allow for a more flexible treatment of Islamic mortgages and thus remove this competitive disadvantage, Sir Howard said.
A new version of Basel II is scheduled to be published on October 1, but will first be implemented around 2006, something that might present a problem for institutions wishing to get into this market, he added. …