ISLAMIC MORTGAGE AND THE

CONVENTIONAL MORTGAGE IN THE UK (A

COMPARATIVE STUDY)
Student Number: 0832934

Degree: BSc (Hons) Business & Management (Accounting)

Department: Brunel Business School

Supervisor: John Aston

Submission Date: 25th November 2010

Word Count: 2541

Contents
Introduction.......................................................................................................................3

Preliminary Literature review:..........................................................................................4

Methodology:....................................................................................................................6

Refrences...........................................................................................................................9

Appendix.........................................................................................................................10

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Student Number: 0832934
Introduction
The purpose of this study is to describe what are the basic and fundamental changes
contributed to the financial system by the Islamic banks in the UK and how do they
differ in terms of ethics from the lending of mortgages in Conventional banks of the
UK. The aim of this research is to investigate the complexities of policies and financial
transactions behind a typical conventional mortgage and an Islamic alternative of
“Murabaha” mortgage. Murabaha in the context of Islamic finance means a contract of
sale of good(s) which occurs between the buyer and the seller, in this type of contract,
the goods and the cost price are clearly mentioned and agreed upon, in addition to that,
the mark up percentage/value over the cost price and the payment date is also mentioned
and agreed upon between both the parties. This context is applied both in a mortgage
situation where the home owner is involved in the transaction and also in a business
situation where a potential trading businessman requires some sort of loan in order to
finance his trading activities.

The main subject-matter of this Research will be the comparison of two banks, one
being a bank dealing Islamic Mortgages and the other in conventional mortgages. This
subject has been of interest to me because of three main reasons: Firstly, I wanted to
enrich my knowledge about Islamic Finance in its theory and practise due the
incorporation of its principles by some of the leading banks in the world such as the
HSBC which opened its “Amanah” bank account in 2003-2004 which serves as an
current account alternative to the clients, this account does not pay interest on savings
account neither charges any amount to the current account. Secondly, my mother
influenced me to take up this topic since she works in the credit risk management
section of the Abu Dhabi Islamic Bank in the United Arab Emirates and I believed she
would help me completing my dissertation by providing the information she possesses.
Thirdly, since this sector of Islamic finance has been seldom researched by University
students and is a completely new area for me, I was interested to perform my research
and write a dissertation on this Topic.

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Preliminary Literature review:
Introduction:

Shariah Law is basically an Islamic religious Law that not only governs the religious
aspect of a Muslim but also many aspects of his of day-to-day activities, Shariah-
compliant financial services are mainly based on Profit and loss sharing activities, and
these investment vehicles do not engage in any form of “Riba” which means usury or
interest, nor involve in any financial transactions dealing with companies which involve
in services such as alcohol, gambling and tobacco.

In a Murabaha mortgage, the bank buys the property as requested by the client and then
transfers the ownership of the property to the client once the cost price plus the mark up
has been completely obtained from the client. The biggest hindrance for this type of
mortgage to flourish in the UK was the double stamp duty which seemed to be very
expensive for the potential Muslim home owners in the UK.

Soon as the double stamp duty provision on Islamic mortgages was removed by the
financial services authority (FSA) in November 2006. The United Kingdom has seen a
dramatic increase in the role of Islamic Finance in the Banking sector. Many of the
obstacles in practising Islamic mortgages were removed over time when the required
changes were made to the UK Tax Law which was introduced in the Finance act of
2003, 05 and 06. In Islamic Banks, Trading of goods is the most commonly used
practise. Owners of trading businesses are simply provided funds in the form of
financial assistance from the conventional banks, whereas according to the trading rules
described by the “Shariah Law”, banks offering finance to businessmen have to be
involved in the trading activities such as sale and purchase of goods. Since the bank
undertakes business risks like the real sector, the bank shares a specific percentage of
the profit upon which both the parties have already agreed upon, the policy is applied
similarly for loss.

Authors and Research

The following authors and their respective researches show that the research question in
my dissertation has not been answered by any of the former researchers in this field.
Justice (Retd.) Muhammad Taqi Usmani is an Islamic Scholar from Pakistan who has

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been serving as a judge in Pakistan's Supreme Court on the Shariah appellate for 2
years. He also holds a number of positions on the Shariah boards of Islamic institutions.
He is currently the chairman of the Shariah supervisory board at Al-Meezan investment
bank. He claims that there is no bank in the world which is “100%” Islamic. Even
though if he is on the Shariah panel of any bank, does not make the bank's activities and
transactions 100% Islamic. His research and theory supports the system of LIBOR
(Inter-bank offered rate in London) in Islamic Banks which use interest as a benchmark
for the profit, however this practise is often criticized on the basis that the profit which
is based on interest is actually interest with another name and should be prohibited.
Muhammad Taqi Usmani in his Book an Introduction to Islamic finance has not
compared the legal financial framework of the conventional mortgage and the
Murabaha mortgage.

Dr. Abu Umar Faruq Ahmed is a senior lecturer in Islamic legal studies, his areas of
expertise is in Islamic Banking and Finance, Islamic Legal Studies, Shariah and Islamic
Legal Financial Theory and Practice, Banking and Islamic Investment Products. In his
book theory and practise of modern Islamic Finance: The case Analysis from Australia,
he has researched on the comparison of Mortgage policies practised by the conventional
and Islamic banks in Australia and has done a comparative analysis of the IFSPs home
financing and a conventional mortgage. His theories are based on the Australian legal
system and how it affects the Islamic Banking sector,

I have chosen this opportunity to perform my research on the section of profit and
interest system in the IBB and the HSBC. Dr. Mansoor Khan is a lecturer in Accounting
at the University of South Australia. Some of his research interests include legal and
Islamic issues of the Shariah in accordance with the theory and practise of Islamic
banking worldwide. In his book Islamic banking and finance: on its way to
globalization. He suggests that the system of Islamic banking and finance is more
ethical and is an efficient alternative to the conventional banking system. Since he has
not performed research on the ethical standards practised by the UK banks against the
Islamic banks in Britain, I would perform my research on the area of ethical standards
maintained in the IBB and the HSBC while granting a mortgage, my research will also
include the various forms of mortgages the IBB offers in variance to the HSBC. Dr
Natalie Schoon is the head of product development in the bank of London and the
Middle East plc. She is the author of the book Islamic Banking and Finance in which

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she has described the practical overview of Islamic Finance. In May 2009, she gave a
seminar on Islamic finance opportunities in Netherland. While her doctorate, she
performed a research on “residual income models and the application to the valuation of
conventional and Islamic banks”.

Bill Maurer is the professor of anthropology and a professor of law in the University of
California. His researches have been conducted on law, property, money and finance.
He is the author of “Pious Property: Islamic mortgages in the United States”. This book
gives a rational understanding of the Islamic mortgage and its service as an alternative
to the conventional mortgage loans in the US. His research is mainly based on the
different psychological mindsets and interpretations of the Shariah law by the American
Muslims and their choosing of the Islamic Mortgage as an alternative. Hence I conclude
my Literature review by stating that the Research topic I have selected in my
Dissertation has been researched and various forms of resources are available to refer,
my research question will be what are the mortgage policies and ethics practised by the
HSBC bank (United Kingdom) and the Islamic Bank of Britain?

Methodology:
In my dissertation the interpretivist paradigm suits the best approach for me to do my
research, data collection, analyzing and interpreting it. I am going to perform my
research using the case study methodology. The issue of the research problem is
restricted to the description of the mortgage policies and ethics currently practiced by
the two banks. The reason I chose the mortgage policies and ethics in particular is
because I will be looking in the financial area of the banks regarding their interest rates,
credit analysis techniques, customer default policies, late payment policies, market
valuation of the properties and the net worth of the property at the end of the repayment
period.

Why Collecting certain Data?

Before I begin collecting data, I will research about the Islamic mortgage principles and
how they differ from the western principles in order for me to gain enough information
on the subject to conduct my research. My data collection will also help me build a
theoretical model in which I will be able to summarize the answer to my research
question, which will give in-depth information about the topic.

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What Data will be collected?

I will collect a mixture of qualitative and quantitative data while using triangulation
method for data collection. The factors responsible for the interest rates on the mortgage
loans charged by the HSBC and the profit rates charged on the Murabaha loans by the
IBB. The policies by both the banks on customers defaulting on repayment and/or late
payments. The key figures analysed and the leverage benchmark used before offering a
business loan for companies or individuals.

What is the Collection Source?

My Collection of data in the research will be mainly consisting of primary data but my
theoretical framework will be based on secondary data which I will collect through
various academic sources including the data bases and journals provided by the Brunel
Library, the internet source, Uxbridge Library and the newspaper articles. My primary
data collection will be done by informal and structured interviews.

What time for collection of data?

My secondary data collection will start within a period of two weeks as soon as my
proposal is accepted; I will begin my primary data collection during the Christmas
holidays and would continue till February as scheduled in the Gantt chart.

How will the data be collected?

I will use my mother as a source for gathering information on the infrastructure of an

Islamic bank, the general ethics followed by the (ADIB) Abu Dhabi Islamic Bank, the
policies of the ADIB regarding interest and profit, I will collect this data by holding
informal interviews with my mother on the internet through web messenger service and
record the instant messages in my archive for further reference, I will also use this
information to structure the questions in my interview, since the time difference
between the UAE and the UK is 4 hours. I would schedule my interviews in the evening
which will be around 5 pm, which would be the best time for me as I would not have
any lecture classes and she would be available too.

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I plan to contact the IBB and HSBC faculty by 20th December as soon as my holiday
starts and request access for interviews with the credit analyst at IBB and HSBC at
suitable date occurring in the second week of January. This will give me time to
perform secondary research with the subject of Islamic mortgage in UK. I intend to do
this by asking the respected representatives to grant me permission to interview them on
a time convenient to them. I will perform these interviews by following the code of
Research ethics and rules laid by the Brunel University. I will take account of my travel
expenses and other related expenses to budget the research activities. In the interviews I
will request the permission of the interviewee to record our conversation for the purpose
of research and to reveal his identity in the research, I will also note down the important
points which come up during the interview which will be held in a place suitable for a
structured interview to take place, primarily in his office. The locations I of the
proposed banks are; HSBC bank in Uxbridge and IBB in Southall.

The interviewer will be asked to offer unbiased answers to the questions posed, since I
am using the interpretivist methodology, in my interview, I will pose the questions
which are more likely to fetch answers which are more valid than reliable.

How is the analysis of Data?

Since my research is using the case study methodology, I have chosen the within-case
analysis for my data analysis. First I will get complete information and study the Islamic
method of mortgage in the UK and how the Islamic bank of Britain gets income if it’s
not charging interest. I am going to study various books published on Islamic Finance to
get an in depth knowledge about the background of the Islamic principles and laws
based on the Shariah which enforces the Islamic bank to a certain ethical behaviour. I
will try to demonstrate my analysis by linking the data collected with the report written,
I will also quantify the results in order to gain access to quick information which will
lead me to draw conclusions over comparative models. I will try to analyze data by
applying the theoretical model I would have created throughout the research on the
primary data in order to generalize the findings to the banks of UK. I would use the
secondary data collected to influence my analyzing of the primary data in order for my
analysis to be representing the research question and not sway off it.

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Limitations of the Research:
 This research has only focussed on two key banks leading in the Islamic banking
sector in the UK and the conventional banking sector, hence my research is
limited to only these banks and not rest of the powerful banks which play a key
role in shaping the economy of the UK.

 My research design has not engulfed many other aspects of Islamic Finance and
banking instruments such as Musharaka (partnership based on joint ownership),
Muqarada (technique to opt for Islamic bonds to finance a certain project, Ijarah
(Islamic leasing service of property), Salam (condition for the validity of sale in
an Islamic transaction according to the Shariah) and Istina (similar to salam).
 My potential problems would be that the respective representatives of the banks
would not allow me to record an in-depth conversation about the mortgage
policies and the credit benchmark used in these banks
 The Gantt chart in the appendix has been subject to my availability, my study
time devoted to other subjects and projects. The time span of the formulated
tasks will be as accurate as possible in order for me to finish the dissertation in
due time, but might overlap existing tasks.

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 References
1. AYUB, M. (2007). Understanding Islamic finance. Hoboken, NJ, John Wiley &
Sons
2. THOMAS, A. (2005). Structuring Islamic Finance Transactions. London,
Euromoney Books.
3. AHMAD, A. U. F. (2010). Theory and practice of modern Islamic finance: the
case analysis from Australia. Boca Raton, Fla, BrownWalker Press
4. KETTELL, B. (2010). Islamic finance in a nutshell: a guide for non-specialists.
Chichester, Wiley.
5. Khan M.M., Bhatti M.I., (2008) Managerial Finance Islamic banking and
finance: on its way to globalization , 34 (10) .
6. ʻUS̲MĀNĪ, M. T. (2002). An introduction to Islamic finance. Arab and Islamic
laws series, 20. Hague, Kluwer Law International.
7. MAURER, B. (2006). Pious property: Islamic mortgages in the United Sates.
New York, Russell Sage Foundation
8. AHMAD, A. U. F. (2010). Theory and practice of modern Islamic finance: the
case analysis from Australia. Boca Raton, Fla, BrownWalker Press
9. http://www.getcited.org/mbrz/11093076
10. http://www.benedix.co.uk/wp-
content/uploads/2009/12/Benedix_Success_Interview-Islamic_Banking-
Dr_Natalie_Schoon.pdf

11. http://www.islamicfinance.de/?q=node/594
12. http://elgamal.blogspot.com/2005/08/another-mortgage-discussion-with.html
13. http://www.accademy.com/archive/fsr/68/1016745

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 Appendix

S O N N D J J F M

Searching Lite...

Designing and writing pr...

Collecting andAnalyzing secondary researc...

Collecting primary researc...

Analyzing primary researc...

writing draft chapters for fee...

Revising, proof-checking printing and binding final disser...

Acknowledgment:

The Gantt charts end date is march 10 but cannot be seen due its compression on a
portrait size page.

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