Growth and Development of Islamic Banking in the UK

It is only in the last five years that the growth of Islamic finance and banking in the UK has taken place but according to Ainley et al (2007), the sharia-compliant transaction in the London financial markets existed even in the 1980s. The Middle Eastern institutions attained liquidity through Murabaha type transactions. Retail Islamic products such as home finance had also started in 1990s. However, due to the absence of any regulatory framework, the consumers of Islamic banks did not have protection as consumers of traditional banking.The UK government has played a proactive role in developing Islamic finance in the country. The government pursued a policy of financial inclusion as it realized that a large section of the Muslim community was excluded from benefiting from the financial services (BTA, n.d.). They could not even avail of house mortgages. With the change in the policy and gradual growth of the Islamic banking sector in the UK, London is all set to be the hub for Islamic banking. The Islamic banking principles do not require the banks to offer an unconditional obligation to repay the amount received. They raise funds based on a profit and loss arrangement through Mudaraba accounts. As such, the Islamic banks act as the investment manager without bearing the risk of loss of the underlying accounts. While the loss has to be borne by the customer, the customer has to share the profits with the bank. This principle was not acceptable in the UK and hence certain changes had to be made. The Financial Services Authority (FSA) and the sharia law arrived at an agreement under which the risk to the customer would be very low.

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