Why expats are putting their faith in Islamic finance

It’s little wonder that more non-Muslims are putting their faith in Islamic finance, writes Ben Flanagan.

Amid the ongoing turmoil in the global markets, not to mention the stream of scandals in the conventional banking sector, Sharia-compliant lenders offer something increasingly rare: An ethically minded, prudent place for your money.

And all evidence points to an increasing number of non-Muslims turning to the booming Islamic finance sector, both in the Gulf and further afield.

According to a November 2013 survey of 5,300 UAE residents by the financial-product comparison site Souqalmal.com, almost 60% of respondents said they hold at least one Islamic-banking product.

While 43 percent of respondents said faith was an important selection criteria, the Souqalmal survey also found that Islamic finance was gaining wider appeal, with more than 50 percent of respondents saying the products have more attractive – and transparent – fees and rates.

Given this generally positive public perception, UAE Islamic lenders are doing more to court non-Muslim customers – and seeing some success in that. The Abu Dhabi Islamic Bank, for example, said last year that 40 percent of its new customers are expatriates, with “a significant share of that business” coming from non-Muslims.

The cornerstone principle of Islamic lenders is that interest, or riba, is forbidden, and so instead they levy fixed fees, or ‘profit rates’, on loans. Sharia-compliant lenders do not invest in certain industries, typically give a percentage of their profits to charity, while some offer women-only banking services.

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Tim Sinclair, senior head of marketing and retail sales at the UK-based Al Rayan Bank, said the principles upheld by Islamic lenders make them attractive to Muslims and non-Muslims alike.

He estimates that 83 percent of the UK lender’s fixed-term-deposit savings customers are non-Muslims, while 47 percent of its ISA customers who joined the bank last year do not follow Islam.

Al Rayan Bank – formerly known as the Islamic Bank of Britain, and which is now part of the Qatar-based Masraf Al Rayan group – in February 2014 published results of a survey that showed that 60 percent of Britons think that Sharia finance is relevant to all faiths.

Mr Sinclair said that non-Muslim customers are attracted to Islamic finance because of the ethical way banks such as his own conduct business, based on prudent spending and the wellbeing of the community.

“Our bank is built and run on ethical principles – derived from trade, entrepreneurship and risk-sharing – that are relevant to customers of all faiths,” he said.

“We provide an ethical alternative to traditional banking. We work with our customers as partners, and will not invest their deposits in activities that are not in keeping with the values of Islam. These include investments connected with gambling, pornography, speculation, tobacco and arms… We are completely transparent about where we invest our customers’ deposits, and, just as importantly, where we don’t invest them.”

Mr Sinclair said other incentives for joining Islamic banks include the fact that they are “not allowed to charge arbitrary fees” to customers, and that the Sharia-compliant banking system has “proven more resilient to the 2008 credit crunch and subsequent world financial crisis than the conventional banking model.”

Despite all that, for many customers it is the fees and rates that are the main factor behind how they choose their bank or loan provider.

Mr Sinclair said Al Rayan Bank’s products “consistently top the best buy tables” in the UK. But do the Islamic-finance products on offer in the UAE compare well with those in the so-called ‘conventional’ sector?

Ambareen Musa, founder of Souqalmal.com, said that rates offered by Sharia-compliant products can indeed be competitive. But she advised UAE residents to do their homework and be aware of the differences in the way Islamic and non-Islamic products are structured.

“Islamic finance is available to both Muslims and non-Muslims. Currently there are over 90 personal loans available in the market and almost half of them are Islamic-finance products,” Ms Musa said. “Products can be as attractive as conventional products – but it is critical to understand the structure before signing up to either product.”

For example, Islamic finance profit rates on loans generally range from 2.75 percent to 26 percent, whereas conventional interest rates can range from 3.99 percent to 26 percent when calculated on a reducing basis, Ms Musa said.

But she advised UAE consumers to consider more than the rate when deciding between products. For example, there are sometimes restrictions on settling Islamic loans early.

“Because they are different financial structures, you also have to take into account other factors such as early settlement fees, [the] upfront or processing fee, and loan repayment periods,” said Ms Musa.

“It is extremely important for anyone to compare apples for apples, basically doing the full calculations of what their monthly repayments will be on different products.  Make sure you understand the different fees applicable on both conventional and Islamic [products].”

Preeti Bhambri, founder of personal finance website MoneyCamel.com, pointed to Ajman Bank’s personal-finance loans, Dubai Islamic Bank and Emirates Islamic Bank car loans, and Abu Dhabi Islamic Bank’s mortgages as offering particularly favourable rates.

She said that Islamic products “are attractive to non-Muslims on account of [the] low rate of interest, payment holidays and lower fees and charges.”

But – just as with the conventional sector – those payment holidays don’t go on forever. As Ms Bhambri said: “Customers should consider affordability and [the] repayment schedule carefully before signing up for a loan – and should not expect it to be waived off just because they are dealing with Islamic banks.”