Islamic Banking Development in the UK. By Wseem Al -Taher.

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Islamic Banking Development in the UK
(Are UK Banks Committed?)
Waseem Zouhair Al-Taher
A dissertation submitted in partial fulfilment of the
requirements of The University of Salford for the degree of
MSc. International Banking & Finance.
Salford Business School
May 2010

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DECLARATION
I declare that this dissertation is all my own work and all the sources of information and matter I
have used for this dissertation have been fully identified, fully referenced and properly
acknowledged according to the University of Salford guideline provided in the Course
Handbook.

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Abstract
Islamic finance has become increasingly significant in financial centres in the West, particularly
the United Kingdom. This study aims to provide an analytical framework for Islamic banking in
the United Kingdom from a marketing perspective in order to investigate the real situation of the
market for Islamic finance in the UK. Also, one of its objectives is to raise the issue of the
importance of Shariah scholars in this industry. A case study of the Islamic Bank of Britain
(IBB), the first retail Islamic bank to operate in the UK in the 21st
Keywords: Islamic banking, Islamic finance, Shariah, Shariah scholars, marketing, Islamic
banking growth in the United Kingdom.
century, has been employed to
evaluate whether this industry is growing in size in the UK or not. In addition to this, a sample of
159 UK university students was surveyed utilising a short questionnaire containing general
questions intended to give an overall idea of the extent to which Islamic banking is known in the
UK. Also, some questions in this survey related to the willingness of the respondents to deal with
Islamic banks and to their opinions of the need for an ethical alternative to the current banking
system. In this study, it has been found that, in the United Kingdom, the industry of Islamic
banking is not growing on retail bases. Also, it has been found that there is a lack of awareness
of Islamic banking in the UK. The analysis tools of variance and Chi-Square test are used in this
study; the results showed that there is a significant relationship between seeing an advertisement
and the willingness to open an account in an Islamic bank; also, the majority of the respondents
deemed that the current banking system needs to be more ethical. In addition, it has been found
that, relatively speaking, there is no negative attitude toward Islamic banking in the United
Kingdom. Finally, there is an urgent need for an aggressive marketing strategy, improved
customer service and training, and an improved image of this industry in the United Kingdom.

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Acknowledgements
First of all, I am extremely thankful to Almighty Allah, who has empowered and helped me to
achieve my missions in life.
I owe a heavy intellectual debt to, my supervisor, Dr. Mike Coulburn, for his valued guidance,
encouragement, supervision and support, who has taught me how to be critical and investigative.
Without his kind supervision, I would never have had the chance to complete my research.
My heartfelt gratitude also goes out to Dr. Faiza Zitouni, for her great guidelines and support that
enabled me to work efficiently.
And never enough thanks to my great and wonderful Mom, Omayma Abdulkalek, for her
precious lifelong efforts, support and her prayers to bring me to this stage.
Thanks Mom!
I am proud to dedicate my research to my beloved great Dad, Zuhair Al-Taher who always wants
me to be the best. Also, I will not forget you, my beloved anti Salma & Ebethaj.
Many thanks also to the most beautiful sister in the world Dima. Big thank to my big brother
Mustafa and congratulation for his engagement. And thank you my brilliant little brother Fares.
I owe my deepest gratitude and thankful to Nadif Barghouti, for his invaluable assistance who is
responsible for the successful completion of my study in the UK. Also, many thanks, to my
wonderful cousin Hala and her beautiful twins, Basel and Tamer.
Also, it would have been next to impossible to write this dissertation without Omar Bargouti help
and support.
Thank you so much to my dearest friend Tarifa. Also, many thanks, to Wafa and Osama Skafi.
Special thanks also go out to, Mohammad Shipli, Khaled Asi, Zaher Hamwi, Muhammad
Bataineh, Muhammad Albiek Bader, Almamri, big thank to my house mate, Muntasir Aladwan.
Finally, I cannot leave Manchester without say thank you to my beautiful teacher, Lisa Whither.

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Contents
Declaration .................................................................................................................2
Abstract ......................................................................................................................3
Acknowledgments......................................................................................................4
List of Tables and Figures...........................................................................................5
1 Introduction.............................................................................................................................8
1.1 Statement of the Problem.................................................................................................10
1.2 Aim of the Study.............................................................................................................12
1.3 Objectives of the Study...................................................................................................12
2 The concept of Islamic Finance.............................................................................................13
3 The birth of modern Islamic banking ...................................................................................15
4 Ethics of the Islamic Financial System.................................................................................16
4.1
4.2 The
Ban on Riba (interest or usury)................................................................................17
4.3
Ban on Al-Gharar (Uncertainty).......................................................................18
4.4
The Ban on Al-Qimar (Gambling) and Al-Maysir (Unearned Income)...................19
4.5
Right to Equal Information.....................................................................................19
4.6
Freedom from Price Control and Manipulation......................................................19
5 The main instruments of Islamic finance..............................................................................21
Risk-sharing and profit-sharing...............................................................................20
5.1
5.2
Murabaha (Cost-plus sale)......................................................................................21
5.3 Mudaraba (profit sharing)........................................................................................23
Ijarah (Leasing).................................................................................................…..22
5.4 Musharaka (partnership financing)..........................................................................23
5.5 Istinaa (Commissioned Manufacture).....................................................................24
6 The role of Sharia scholars in ruining the modern industry of Islamic finance...................25
7 Overview of the UK Financial System.................................................................................28
8 Islamic banking in the United Kingdom..............................................................................30
9 The case study of the Islamic Bank of Britain plc (IBB).....................................................34
9.1 Overview of the Islamic Bank of Britain plc (IBB)................................................34
9.2 The number of branches ..........................................................................................35
9.3 The image and customer service.............................................................................36
9.4 IBB Islamic products..............................................................................................38
9.5 The number of employees.......................................................................................40
9.6 The assets................................................................................................................41
9.7 Ownership equity....................................................................................................42
9.8 Market Value..........................................................................................................43
9.9 Turnover (revenue).................................................................................................43

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9.10 Number of customers and deposits..........................................................44
9.11 Review.......................................................................................................45
10 Research methodology ................................................................................................47
10.1 The Literature review..................................................................................47
10.2 Case study..................................................................................................48
10.3 Questionnaire.............................................................................................49
10.4 Data collection...........................................................................................49
11 Results and discussion………………………………………………………….…...51
12 Conclusion……………………………………………………….….........................56
13 List of References.......................................................................................................58
14 Appendix 1: Islamic banking questionnaire…………………………………….......68
15 Appendix 2: Frequency Tables………………………………………….…...….......70
15.1 Appendix 2.1: Crosstabulation and chi-square test ...........................................75

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List of tables
Table 1: Top countries by value of Shariah compliant assets $bn, 2008……………………….........32
Table 2: The Average number of employees and their wages and salaries in £ million at IBB for the fiscal
years 2004-2008....................................................................................................................................40
Table 3: Property and equipment, and total assets at IBB for the end of years 2004 to 2008 in £…...41
Table 4: Ownership equity after all adjustments, and retained profit & losses account at IBB for the end of
second fiscal year 2004 to 2008 in ………………………………………………………….….….…42
Table 5: Share price, market value, and number of shares at IBB for the end of second fiscal year 2004 to
2008 in unmodified £………………………………………………………………………….….….. 43
Table 6: Revenues at IBB for the end of second fiscal year 2004 to 2008 in unmodified £……....… 43
Table 7: Number of customers, and total deposits in £, and (calculated) average deposits per customer £,
for the period 2004 to 2008……………………………………………………………………….…..44
Table 8: Frequency Table ....................................................................................................................50
Table 9: Have you seen any advertisement Islamic banking products in the UK................................52
Table 10: Do you think that the word Islamic in "Islamic banking" would has a negative impact on the
growth of this industry.........................................................................................................................54
Word count: 12932 words.

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1. Introduction
With the growing importance of Islamic finance around the world, due to the movement of
Islamic banking it has become more desirable, and enjoys wide interest in the west, particularly
in the United Kingdom.
The global market for the Islamic finance industry has grown by 10 -15 percent per year and the
trend is expected to continue (FSA, 2007). Also, the global assets of this industry are in excess of
$1Trillion according to Ismail (2006), while some published reports expect this industry to reach
US$4 trillion in the next five years (Zawya, 2010).
While, the assets growth in the top 1000 World Banks slumped in 2008 to 6.8% from 21.6% in
2009, the top 500 Sharia compliant assets achieved an extremely strong growth rate of 28.6%,
rising from US$639 in 2008 to US$822 billion in 2009 (The Banker, 2008).
At the present time, there are more than 300 Islamic financial institutions in over 51 countries
offering Islamic finance compliant with Islamic principles and Sharia law (IMF, 2007). There are
a further 191 conventional banks around the world that have a Sharia window (The Banker,
2008) which implies that Islamic finance is not restricted to Arab or Islamic countries.
Despite the fact, that the Islamic form of finance has a centuries-old history (Iqbal & Llewellyn,
2002) the idea of modern Islamic banking and finance is still young, and represents only 1
percent of global banking assets (Financial Times, 2007).
Although, the market of Islamic finance is currently most developed in Arab and Muslim
countries such as Malaysia, Iran, and the Gulf Co-operation Council (GCC) (IFSL Research,
2009), this industry is expanding and thriving in other countries where Muslims are a minority,
such as the United Kingdom, Japan, and Europe (Buchanan & Solanki, 2009). In addition, a
recent study by Wilson (2007) states that many major European banks perceive it as an
alternative opportunity to create new business, rather than as a threat to existing business.

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However, outside the Muslim world, particularly in the UK, Islamic finance is seen as a good
business opportunity that will add diversity to an already highly mature financial sector
(Financial Times, 2009). It is not surprising that London is leading the race to be both the
western and the world centre of Islamic finance, since it has the most expert bankers, the most
advanced regulation, and a government that remains committed to the sector on both financial
and social grounds
However, despite this remarkably supportive environment for Islamic finance in the UK, this
industry has been facing many challenges since its origin.
(Oakley, 2009). These factors will provide a favourable environment for
investment opportunity in Islamic finance within the UK; it will also encourage both new Islamic
and conventional banks to set up operations in the UK, which will help to establish this young
and promising industry in the western world.
From my point of view, the instruments of this industry are still relatively unknown to Muslims
and non-Muslims alike; one of the most vital challenges to face Islamic finance recently is how
to catch the attention of both Muslim and non-Muslim people in the UK, in order to enhance and
develop this industry.
Marketing is very important to developing and strengthening any industry. Thus, as Islamic
banking and its products are growing in the UK it is necessary to focus on its market
development, or, in other words, to adopt a clear marketing strategy.
Dixon (1992) has stated that “the west has failed to adopt a positive attitude towards the needs of
Islamic banks”. In general, attitude is an important problem facing the development of Islamic
banking system in the West.
Attitude can be defined as “the way people think, feel, and act toward some aspect of their
environment” (Hawkins et al., 2004, p.413).
This negative attitude not only in the west, but it also among some Muslims can be proven by a
recent study carried out by Karbhari et al. (2004, p.528) that found that most potential customers
of Islamic banks, whether in non-Islamic countries or Islamic countries, either tend to be
unaware of them or try to avoid them.
There are many reasons for such attitudes; one of the most important reasons is that the idea of
Islamic banking is relatively new and many are unaware of its advantages. In addition, people

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(Muslims or non-Muslims) in the industrialised world are accustomed to dealing with highly
experienced conventional banks and are not yet ready to take the risk of using a new financial
system (Karbhari et al., 2004, p.528).
Relatively speaking, the British community is well known as an ethical community. And since
Islamic banking is all about ethical banking (ISRA, 2008), one of the objectives of this study is
to remove the dust of this side, because at the end of the day many investors are looking at the
ethical side of finance (ISRA, 2008). However, this dust will not be removed as long as the
majority of people are still unaware of this industry, which clarifies why a heavy marketing
strategy is a vital issue for Islamic finance and its banks.
1.1Statement of the Problem
Over the last three decades there a considerable number of theoretical studies on Islamic banking
and finance have focused on Islamic concepts, modes, and mechanisms, as well as on the
challenges and opportunities that are facing this industry. However, only a few studies have paid
attention to the marketing side of it. Thus it seems there is gap in this area of Islamic finance.
Many studies have stated that Islamic finance is growing sharply around the globe, and in the
west, particularly in the United Kingdom. The UK has witnessed a significant part of this growth
with many high street banks offering financial products based on Islamic interest-free models,
such as HSBC, Barclays, Lloyds TSB, and a number of fully Islamic banks and financial
institutions, such as the Islamic Bank of Britain.
Also, when Prime Minister Gordon Brown was the Chancellor of the Exchequer he declared that
he wanted to make the UK a centre for Islamic investment (BBC, 2006). Brown also said,
“Entrepreneurial vibrancy and dynamism of Britain's Muslims, combined with Britain's
openness to the world and the historic ties with Muslim countries that makes the ambition to
make Britain the gateway to Islamic finance and trade a realistic and realisable ambition"
(Fontanella, 2006).

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Thus, what has been stated above in addition to the important support and regulatory reforms of
the UK financial regulatory body, represented by the Financial Service Authority (FSA), it seems
that the Islamic financial industry is thriving and wide spread in the UK.
In fact, this industry could be thriving in the UK and a significant number of specialists,
financial legislators, and academics who are involves in this field are well aware of this
promising industry; but from my point of view, a significant part of this problem is that neither
Islamic finance nor its products are yet widely known among the public, and few know much
about it.
Another part of the problem is that Islamic finance is a hot topic in the media. Despite the
overall growth, the penetration on the Islamic retail side has been very modest, and it is still rare
to see any promotions or advertisements for any Islamic products in the UK; such promotions
would draw attention to this industry and its retail base, which would create the widest possible
acceptance and distribution of its retail products among ordinary UK Muslims and non-Muslims.
Thus, one purpose of this research is to raise awareness of the importance of promotions and
advertisements, and to pay more attention to the image of this industry in order to enhance the
growth of the existing Islamic banks in term of size and profits.

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1.2 Aim of the Study
Various studies over the past two decades have shown that Islamic banking is growing in the
UK. However, despite the fact that many Islamic financial products are available in the UK from
a number of High Street banks and several new fully Islamic banks, the majority of people are
unaware of these products. This indicates that an aggressive marketing campaign is needed.
Thus, the main aim of this study is to present an analytical framework for Islamic banking in the
United Kingdom from a marketing prospective.
1.3Objectives of the Study
While there seems to be a general consensus in the world economy that Islamic banking has
become a reality that cannot be ignored (Chung, 2008, p.157), very little progress has been made
in marketing Islamic banking
Thus, the first objective of this study is to identify the principles and the main instruments of
Islamic banking; it will particularly focus on Islamic banking products that have been offered in
the UK because an in-depth understanding of these will facilitate marketing.
The second objective is to explain why marketing Islamic financial service is a vital issue in the
UK.
The third objective is to raise awareness of the importance of promotions and advertisements for
UK Islamic banks.
The fourth objective of this research is to arrive at a better understanding of the market for
Islamic finance in the UK.
And the last objective is to evaluate the growth of the first purely retail Islamic bank in the
United Kingdom in the 21st
century in order to determine whether this industry is really growing
in the UK or not.

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2. The concept of Islamic Finance
Islamic finance is a financial system like any other financial system, but it is based on Sharia
(The Islamic law), which is derived from two main sources; the Quran, the Holy book of
Muslims and the Sunnah which is the way of life, based on the teachings and practices of
Prophet Muhammad (peace upon him). At this point, it important to mention that the life of the
Prophet has been more extensively documented than any other human being in history; his
companions meticulously recorded his every spoken word, action, and instruction (Ayub, 2007),
in addition to “al Fatwa’s”, which are the rulings of Islamic scholars.
The major principle of Islamic finance is the prohibition of giving or receiving interest earnings
or usury (Arabic term: riba) (Iqbal, 2001), since earning profit from an exchange of money for
money is considered immoral in Islam (Sufian, et al., 2008, p.2). However, this prohibition is not
to be confused with a rate of return or profit on capital, as earnings a profit is encouraged in
Islam. It should be noticed that Islam linked the return with productivity in order to ensure a
more equitable distribution of wealth (El Qorchi, 2005).
However, in addition to the major prohibition of Riba, Islamic finance has a number of norms
and principles to govern the rights and obligations of parties to the contracts: “Principles
enunciating justice, mutual help, free consent and honesty on the part of the parties to a contract,
avoiding fraud, misrepresentation and misstatement of facts and negation of injustice or
exploitation provide ground for valid contracts” (Ayub, 2007, p. 64).
However, Islamic finance has been defined differently by different economists and scholars.
According to Ayub (2007), “Islamic economics is the knowledge of application of injunctions
and rules of shari’ah that stop injustices in the acquisition and disposition of material resources
in order to provide satisfaction to individuals and enable them to perform their obligations to
Allah and society.”
Thus, the Islamic financial system seeks to provide socio-economic justice and equitable
distribution of income and wealth, as well as stability in the value of money to enable the

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medium of exchange to be a reliable unit of account (Association of Islamic Banking Institutions
Malaysia, n.d.).
It is important to note that the Islamic financial system deals with issues such as how to create,
distribute, own, and enhance wealth and how to spend it for the benefit of individuals, as well as
societies. Hence, it encourages the distribution of wealth between individuals in order to promote
the welfare of the whole society by forbidding the accumulation of wealth in a few hands. This
implies that the concept of fair-trade, as it exists in the 21st
At this juncture, an important point should not be forgotten, which is that the structure of the
Islamic financial system under the umbrella of Sharia law applies to all Muslims and non-
Muslims.
century, has been at the core of
Islamic economics for fourteen centuries.

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3. The birth of modern Islamic banking
Islamic finance is old as well as new. It is as old as the religion of Islam itself, which has existed
for more than fourteen centuries, and it is new, because the new form, or modern Islamic finance
and its products, have existed for only four decades (Bakar, 2006).
The first modern institutions offering Islamic financial services emerged in 1963 in Egypt under
the cover of profit-sharing,
Since then, Islamic banking has spread to a large number of Arab and Muslim countries such as
Malaysia, Iran, Sudan, and Pakistan; also, many Islamic financial institutions have developed in
countries where Muslims are a minority, such as the United Kingdom.
without projecting an Islamic image due to political issues; this
experiment lasted until l967 (Ariff, 1988). However, the actual movement of the modern Islamic
banking and financial system started in the seventies, with the revolution of the oil industry in
the GCC countries. At this time a number of Islamic banks came into existence, such as the
Dubai Islamic bank and the Jeddah-based Islamic development bank in 1975 (Ayub, 2007, p.
15).
However, the first attempt to establish Islamic banking in the west was in Luxemburg in 1978,
which is now called Islamic Finance House. There is also an Islamic Bank International of
Denmark, in Copenhagen and the Islamic Investment Company, which has been set up in
Melbourne, Australia (Ariff, 1988).
At the end of the 20th
century and with the beginning of the 21 century different Islamic banking
models have arisen, ranging from wholly Islamic institutions, Islamic subsidiaries of
conventional banking groups, and Islamic banking windows within conventional banks such as
HSBC Amanah (HSBC Amanah, 2009).

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4. Ethics of the Islamic Financial System
In general, Islamic economics does not accept a profit when doing so would cause harm to others
or when the gain is not matched by real work; also, Islam strongly rejects an economy based on
usury and taking money from people wrongly. Prophet Muhammad (peace upon him) said, “the
best profits for the sale of the work of the man with his hand".
Hine (2008), head of responsible investment development at Ethical Investment Research
Services, argues that the current financial crisis is a direct result of people not investing ethically.
In relation to this, banks are the main source of money in the economy. In addition, banks have
an important role in creating money and providing jobs; also, banks protect the stability of the
financial system. This implies that the financial systems have a socio-economic responsibility.
Thus, it should be noted here, that the fundamental features of Islamic economics and finance is
socio-economic and distributing justice (Ayub, 2007, p. 12).
Relatively speaking, most business actions, choices, decisions, and judgments have ethical
aspects (Sternberg, 2000, p.16); hence, it seems that ethics is a vital issue in businesses and
finance.
Thus, it is important to consider the ethics of the most controversial financial system in recent
times, which is the Islamic financial system; this is because it is based on ethics as well as on
efficiency (profitability) (Siddiqi & Adress, 2001, p.1).
Islam is not merely a religion; it provides for Muslims and non-Muslims a complete code of
conduct for all areas of human existence: individual and social, material and moral, economic
and political, legal and cultural, national and international (Pervez, 1990, p.259). This indicates
that Islamic economics and finance has a comprehensive system of ethics and morals.
However, from a marketing point of view, in order to market a new product, it is important to put
a bright face on it; thus, in order to market Islamic finance in the west it very important to
explain some major norms and practices of Sharia-compliant finance, or the ethics of Islamic
finance.

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The ban of interest or Riba is the major principle of Islamic finance in general and in Islamic
banking in particular. Hence, giving or receiving interest (usury) is forbidden in Islam.
4.1 Ban on Riba (interest or usury)
Basically, Islam is based on justice and mercy; thus, the exploitation of people’s need for money
to satisfy their basic needs or on humanitarian grounds, such as eating or living, by asking them
to repay an extra amount of money when they are given the money, is kind of injustice since in
Islam people should help each other without waiting for an award. On the other hand, when
people borrow money for trade, the lender should share their profit with them, as well as the risk
of loss; this is known as profit-loss sharing (PLS).
Some argue that, sharing the profit with the lender is an injustice from the borrower’s point of
view; in contrast what in the case of loss, how the borrower will pay off the money. Thus as
Islam is encouraging justice and has to pay attention to ensuring a more equitable distribution of
wealth, it has banned charging interest and replaced it with a profit-loss sharing through some
Islamic instruments such as Murabaha and Musharaka concepts, which will be explained later.
There are many verses in the Holy Quran in reference to Riba; one of them is as follows:
“Those who devour riba will not stand except stands as one whom the evil one by his touch hath
driven to madness. That is because they say: “Trade is like riba,” But God hath permitted trade
and forbidden riba. Those who after receiving direction from their lord, desist, shall be
pardoned for their past; their case is for God [to judge]; But those who repeat (the offense) are
companions of the fire: They will abide therein [for ever]” (The Holy Quran, 2:275)
However, in the context of banking and financial intermediation, “loans are funded by pooling
together the savings of the depositors. The reason for injustice from the perspective of the
depositors as lenders is that when loans are made with their money into highly profitable
investments, the depositor only receives a small share as interest payment, while the borrower
who has utilized the money retains an unfair proportion, and is able to extract further value by
reducing tax liabilities by writing off interest payments” (Bokhari, 2003).

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Thus, in the Islamic financial system, the profit-loss sharing principle is fair for both depositors
and investors because the profits are shared by the depositors in the bank, as well as the users of
the funds.
On the other hand, according to Pervez (1990, p. 264), some argue that the nominal interest rate
is justified as it is a fair compensation for inflation; otherwise, the value of money declines over
time. In fact, it is impossible to accurately predict an inflation rate for a reasonable subsequent
period of time, and there is much involved in charging interest than compensation for the
inflation rate alone. Thus, if this is true, why have the prices of goods and property increased
much more than is compensated for by the interest rate?
Also according to Pervez (1990, p. 264), the role of the interest rate in compensating for inflation
and the reduced value of money, has a disadvantageous effect on both the depositors and society,
because it has a positive effect on the investors by increasing their wealth at the expense of the
depositors.
4.2 The
All banks try to avoid or minimise the element of uncertainty through their risk management
tools. These tools are well established in Islamic principles through what known as al Gharar or
uncertainty (Al-Saati, 2003, p. 3).
Ban on Al-Gharar (Uncertainty)
Gharar is an element of deception, either because of ignorance, regarding the status of the goods,
the price, or the condition of the goods, which is not consistent with the initial description of the
goods. In this case one or both parties stand to be deceived through ignorance of an essential
element of exchange (Alielgari, 2003, p.12).
However, Islam prohibits all forms of Al-Gharar or uncertainty, unless all of the terms and
conditions of the risk are clearly understood by all parties (Lewis, 2007, p.3).

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Islam prohibits gains made from games of chance and unearned income (al-maysir), such as the
playing the lottery, or gambling (al-qimar) (Obaidullah, 2005, p.11). Since these games involve a
high degree of risk and uncertainty, they are prohibited in Islam because it is very difficult if not
impossible to properly assess them based on the available information. In addition, they cause
enmity and hatred in the society (Al-Saati, 2003, p.8).
4.3 The Ban on Al-Qimar (Gambling) and Al-Maysir (Unearned
Income)
Islam attaches great importance to the role of information in the market. Banks and financial
institutions try to avoid asymmetric information, which exists when one person knows more than
another (Shefrin & Statman, 1992, p.8).
4.4 Right to Equal Information
In Islam, releasing inaccurate information or hiding some information on purpose is forbidden;
also, Islamic scholars state that a transaction must be free from jahalah, or misrepresentation, to
be considered Islamic (Obaidullah, n.d).
Fair trade organisations argue that the present global system of ‘free’ trade is characterised by
injustice and exploitation as rich countries often subsidise their exports and restrict imports,
while at the same forcing poor countries to liberalise their economies (Khan & Thaut, 2008,
p.11); such policies lead to making the poor poorer and the rich richer.
4.5 Freedom from Price Control and Manipulation
According to The British Association for Fair Trade Shops (2010), Fair Trade in Europe started
as a grassroots movement about 40 years ago, while in Islamic economics this principle has
existed for 14 centuries.
In Islam (from a non-religious point of view), according to Obaidullah (2005, p.12) and Ayub,
(2007, P. 68) the basic principle with regard to trade is that the market should be fair and left free
to respond to the forces of supply and demand, natural competition, and to avoid injustice on

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behalf of suppliers of goods and consumers. This means that price controls, tariffs, and any
other barriers should be removed so that trade can be free and fair, and government should not be
involved in fixing prices except when obvious pitfalls are noticed within the market. However, at
this point, the Islamic economic system is very similar to the capital economic system. Though,
the western countries have paid more attention to the concept of fair trade than the current
Muslim countries.
Also, Islam prohibits monopolising goods to gain higher returns in the future or to dominate the
market. Though, to be fair, in this context one should note that the west itself has amended its
curricula and enacted a new law to cope with monopolies (Steiger, 1995).
In Islamic banking the parties involved in a financial transaction must share both the associated
risks and profits. Islamic banks do not levy interest, as such, but rather participates in the yield
resulting from the use of funds. The depositors also share in the profits of the bank; there is a
kind of partnership between the Islamic bank and its depositors, on one side, and between the
bank and its investment clients, on the other side. The bank functions as a manager of depositors’
resources in productive uses (Lewis, 2007, p.3).
4.6 Risk-sharing and profit-sharing
However, it seems that the Islamic financial system has golden rules of ethics, but the questions
now, are these rules really exist in the current Islamic financial system?

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5. The main instruments of Islamic finance
Islamic markets offer different instruments, or financing methods, to satisfy Muslims’ needs in a
variety of ways. In what follows, the most common instruments in Islamic finance will be
explained; also, both their Arabic and English names will be utilised.
Murabaha is one of the most popular and widely used instruments for short-term financing; it is
similar in form to purchase finance and around 75 percent of Islamic financial transactions are
based on Murabaha (Iqbal, 1997, p.44). Murabaha is one kind of absolute sale (asset for price);
it is selling a commodity for the purchase price plus an agreed upon profit margin, which can be
a percentage of the purchase price or a lump sum (Khoja, n.d.).
5.1 Murabaha (Cost-plus sale)
According to Khoja (n.d.), Murabaha sales are divided into two types:
There are two parties in an ordinary Murabaha sale, the seller and the buyer. The seller is an
ordinary trader who buys a commodity without depending on a prior promise of purchase, and
then he displays it for Murabaha sale for a price and a profit to be agreed upon.
Ordinary Murabaha sale
This form of Murabaha sale is used by the Islamic banks; there are three parties involved: the
seller, the buyer, and the bank, which acts as an intermediary trader between the buyer and the
seller. The bank does not purchase unless the buyer specifies a desire and a prior outstanding
promise to purchase.
Murabaha sale connected with a promise
However, it is worth mentioning that, the profit margin is benchmarked to the prevalent market
interest rate (Ibrahim, 2007, p.27).

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Also, the profit margin is fixed before the deal closes and cannot be increased, even if the client
does not take the goods within the agreed time, while conventional financing transactions usually
provide for default interest on late payment of amounts due. Such charges are not possible in
Islamic finance, since any excess paid above the principal as Riba (interest) is totally prohibited
in Islam (Rowey, et al., 2006). Indeed, this matter could create a problem for the bank, when the
customer knows that there are no penalties for defaulting on the payment. However, since there
is no real solution to this problem, some Shariah scholars think the bank should be allowed to
charge a payment for default or late payment, but the amount charged must be given to charity in
order to ensure that the financial institution does not benefit from the penalty charged (Gulam,
n.d.).
However, when using Murabaha methods, it is good to mention that “the debt has to be paid
back irrespective of profit or loss to the person or institution that purchase on credit and suffered
loss or the wares destroyed in his ownership” (Ayub, 2007, p. 76).
Ijara is another popular instrument of Islamic finance; it accounts for about 10 percent of Islamic
financial transactions (Iqbal, 1997, p.43). Ijarah, basically, is designed for financing vehicles,
machinery, equipment, and aircraft (Iqbal, 1997, p.43). The Ijara is a leasing agreement where
the bank purchases an asset and leases it out to the customer; the Islamic bank or the financial
institution owns the asset throughout the lease period and the customer pays the financial
institution a rental fee each month during the leasing period (Chiu & Newberger, 2006).
5.2 Ijarah (Leasing)
In addition, the financial institution will recover the capital cost of the equipment plus a profit
margin out of the rent payable (Rowey, et al., 2006).
According to Rowey et al. (2006, p.3), there are two types of Ijara: operating leases and lease
purchases. In a lease purchase, the period of the lease is spread over a long period of time;
therefore, the lessor is able to repay the costs of the asset with profit and retain relatively higher
financial security; at the end of the lease period, the lessee has the option to purchase the asset at
the market value.

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However this kind of Ijara creates a problem under Islamic finance principles as lease rentals
cannot be determined in reference to interest rates, because the amount and timing of the lease
payments should be agreed in advance (Rowey, et al., 2006).
Where an asset is financed through operating leases, the usufruct generated by an asset is sold to
a lessee for a fixed period and for a fixed price; while the lessor retains the risk in property, the
lessee is responsible for usual maintenance. As this lease is for a short period, the risk to the
lessor is higher (Ibrahim, 2007, p.29).
5.3 Mudaraba (profit sharing)
The Mudaraba is a profit sharing contract often used for investment funds (Rowey, et al., 2006);
there are two parties involving in this contract, one party providing 100 percent of the capital,
and the other party (the mudarib) providing its expertise to invest the capital, manage the
investment project, and if appropriate, provide labour (Rowey, et al., 2006). In this contract, any
profits generated will be distributed according to a predetermined ratio, but like the capital itself,
profits cannot be guaranteed (Rowey, et al., 2006). However, according to Ibrahim (2007, p.27),
losses are rarely reported, or may only be suffered in theory.
5.4 Musharaka (partnership financing)
The literal meaning of the word Musharaka is sharing. Musharaka is a mode of Islamic
financing that usually used for financing fixed assets and working capital of medium- and long-
term duration; it is similar to a classical joint venture (Iqbal, 1997, p.44).
The Musharaka involves a partnership between two or more parties who provide capital towards
the financing of new or established projects (Rowey, et al., 2006).
In Musharaka, all partners share the profit according to a specific pre-agreed ratio, while the loss
is shared according to the ratio of the contribution (Rammal, 2004). Also, one or all parties can
undertake management of the project, since both parties take on project risk and they will be
compensated for their managerial skills (Rowey, et al., 2006). However, it is relatively rare for
banks to participate in Musharaka transactions (Rammal, 2004).

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5.5 Istinaa (Commissioned Manufacture)
In Istinaa goods are manufactured with a promise to produce a specific product that can be made
under certain agreed specifications at a determined price and on a fixed date; the agent contracts
with a manufacturer to produce the commodity and the customers make payments to cover the
production price and the profit margin (Ayub, 2007, p. 77).
With these vary financing methods it seems that Islamic banking provides the base for
developing a wide range of more sophisticated and complex financial instruments in the future.

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6. The role of Sharia scholars in ruining
the modern industry of Islamic finance
As mentioned earlier in this study, it has been observed that many Muslims tend to avoid dealing
with Islamic banks, but, why do they take this attitude? Many Muslims were asked by the writer,
why they do not prefer Islamic banks. In general, their answers were because that they believe
that Islamic banks do not differ from conventional banks, except in name. For instance, they
claimed that, in many cases this "profit rate" is competitive with the conventional banking
system's interest rate, but under a different name. However this is not consistent with the findings
of this study and it needs further research.
To some extent, this might be true from their point of view. Thus, here the role of the Shariah
scholars arises. The Shariah scholars or Shariah board is an important element of the Islamic
financial institution and the conventional institutions that provide Islamic products, because it
gives the institution the right to market themselves or their products as Shariah compliant.
In fact, Islamic finance products require a “religious stamp” of approval before any Islamic
finance product such as a bond, mortgage contract, etc. can be marketed as moral according to
the standards of the Holy Quran (Heneghan, 2008).
This stamp must be provided by a Shariah scholar or Shariah board (scholars in Shariah
matters); this board has been used to supervise the operations of every Islamic financial
institution to ensure that the operations and code of conduct of Islamic banks is in accordance
with the rules of Shariah (Iqba & Mirakho, 2004, p.20
However, the role of Shariah scholars involves more than applying the avoidance of interest or
usury or screening to ensure equitable practice. For instance Barclays offers interest-free
products for Muslims and Arabs when they ask for Islamic accounts. Indeed, Islamic finance is a
comprehensive system involved in all aspects of life.
).

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There is a general consensus that there is a shortage in Shariah scholars around the world, and I
add here that there is shortage of qualified & efficient Shariah scholars.
Shariah scholars must first study Islamic law or Shariah for many years, and then master finance
(Foster, 2009). They should be fluent in the English and Arabic languages, since almost all
publications regarding the science of finance science are in English and the Holy Quran and
Islamic principles are in Arabic; it is difficult for those who are not native speakers of Arabic to
get a deep understanding of Islam in order to apply it in financial science. Unfortunately, there is
a shortage of scholars familiar with all these fields.
However, to answer the question of how the Shariah scholars would ruin the Islamic financial
system it is important to look at what an investment banker based in Dubai, working for a major
Western financial organisation has said:
“We create the same type of products that we do for the conventional markets. We then
phone up a Sharia scholar for a Fatwa (seal of approval), confirming the product is
Shariah compliant. [...] If he doesn't give it to us, we phone up another scholar, offer him
a sum of money for his services and ask him for a Fatwa. We do this until we get Shariah
compliance. Then we are free to distribute the product as Islamic." (Foster, 2009).
Also according to Foster (2009), it should be noted that Shariah advisers or scholars can earn up
to $100,000 per fatwa, or religious edict, on a contract. Thus it seems that in "Fatwa shopping"
by offering some extra money you could make any product compliant with Shariah.
Prophet Muhammad (peace upon him) said “The scientists are the heirs of the prophets, they did
not inherit Dinar or Dirham (money), but they inherited science, and who has taken it, has taken
an immense well”.
The above quote shows that for Muslims, money should not be matter for Shariah scholars, since
there Fatwa should be for the benefit of Islam in general and Islamic finance in particular.
Another explanation for the shortage of qualified scholars is what Mr. Majid Dawood, chief
executive of Yasaar, a UK-based Islamic finance consultancy says: "Everything that is not
forbidden in the Holy Qur'an is OK” (Foster, 2009). What Dawood had said only reflects half of

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the picture, since if something is not forbidden in the Holy Quran, it does not mean that it is
complies with Shariah, since as previously stated, Islamic sources are not only derived from
Quran, but also from other sources.
Therefore, as the basic principles of Shariah have been set by God, as Muslims believe, this
system should be the ideal financial system; hence the wrong practice of some banks based on
what some scholars have approved could negatively affect the whole Islamic financial system.

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7. Overview of the UK Financial System
The United Kingdom has a long history of financial industry. Banking in the United Kingdom
started in the 17th century. The industry grew out of the profession of goldsmiths, as after the
dissolution of monasteries, makers of gold and silver plate started to have significant stocks of
gold (History of Banking in the UK, n.d.). Also, the United Kingdom has the second oldest
central bank in the world, “The Bank of England” (currency.com, 2010), which was founded in
1694 to act as the government's banker and debt-manager (Bank of England, n.d).
Additionally, the United Kingdom has two of the oldest conventional banks in the world: The
Bank of Scotland (now Halifax Bank of Scotland), which was established in 1695 and C. Hoare
& Co. in London, which was established in 1672 (Lankow, 2008).
Due to the Industrial Revolution and growing trade the number of banks increased, especially in
London, and by 1784 there were around 100 provincial banks (History of Banking in the UK,
n.d.).
According to the FSA, there are more than 300 deposit-taking financial institutions and about
100 non deposit-taking financial institutions operating in the United Kingdom in 2010 (FSA,
2010), which makes London the largest financial centre in the world (BBC, 2008).
According to Heffernan (1996), the UK financial system is characterised by a specialist and
differentiated financial system in the following categories:
• Commercial banking;
• Investment and merchant banking;
• Insurance;
• Fund management;
• Housing finance;
• Securities trading.

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London is the largest market in the world for foreign exchange dealing, and the largest centre for
interbank transactions and syndicated loans (Wilson, 1999, p.425
In addition, London is well-known for taking the advantage of any new financial trend. Also, it is
recognised as being willing to innovate and respond flexibly to any new ideas; it has the most
expert bankers and the most
).
advanced regulation in the world. London has a deep and liquid
market and the exchanges are the most frequently used venue for listing and trading financial
instruments globally (Ainlev, et al., 2007).
Moreover,
Thus, all these factors enhance the UK position as the leader in every new financial industry.
the UK financial services industry has a proven record of developing and delivering
new products and a large pool of legal, accounting, and financial engineering skills. (Ainlev, et
al., 2007). Another important point to note is that the English law the preferred legal jurisdiction
for many international business and financial firms (Ainlev, et al., 2007).

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8. Islamic banking in the United Kingdom
To go back to recent history, it seems that the relations between the Islamic financial system and
European banks started in the 1920s when the Eastern Bank, the predecessor of Standard
Chartered, was asked the ruler of Bahrain if the bank could open a branch in Bahrain if it
avoided all interest based transactions (Wilson, 2007, p.2). This indicates that the European
bankers started to learn about Islamic finance more than eighty years ago, thus it is not surprising
to see the western world, particularly the UK, in the lead of this industry.
London is considered to be a global cynosure for managing and attracting foreign capital, in
particular it is seen as a safe store for Islamic wealth, which looks for safe investment.
In addition, many factors have facilitated Britain in becoming the leader of Islamic banking and
finance among the European countries, which makes it looks forward to becoming in the next
few years to the global centre of the Islamic finance and banking industry. On top of these
factors is the government support for success of this industry (McKenzie, 2009), IFSL’s Director
of Economics, said, "The UK has benefited considerably from supportive Government policies
intended to put Islamic services on the same footing as conventional services" (Beckford, 2009).
The second factor is the law firms; the UK is a major global provider of specialist legal expertise
required for Islamic finance (McKenzie, 2009, p.6). Also, English law is the preferred legal
system for many international companies and organisations around the globe.
Another important factor that enhances the position of the UK as the leader in this industry is the
professional service firms; the Big Four professional services firms (PricewaterhouseCoopers,
KPMG, Ernst & Young, and Deloitte) have each established an Islamic finance team in London
to provide specialist services including advice on tax, listings, transactions, regulatory
compliance, management, operations, and IT systems (McKenzie, 2009, p.6).
The last factor, but not the least, is Education and training; it is widely agreed that there is a
global shortage of experienced professionals in the Islamic finance sector (Ainlev, et al., 2007),
and in this context the UK has become the leader in providing training, education, and research

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in the Islamic banking and finance field with 55 institutions providing Islamic finance skills and
courses (McKenzie, 2009, p.6). The UK has done more than any country in the world in this area
with its courses ranging from small course to a masters degree, such as that offered at the
University Of Salford.
The steps taken by the UK to facilitate Islamic banking indicate that the there is a growing
interest in Islamic finance in the UK.
London has been providing Islamic financial services for 30 years (Cahn, 2007). Yet, only in the
past few years has this industry begun to receive greater attention.
However, there are currently three types of Islamic financial providers in the UK:
• Conventional banks which provide different types of Islamic products through what is
called an “Islamic window”
• Retail Islamic banks
• Wholesale Islamic banks
According to McKenzie (2009, p.1), there are 22 banks, including five that are fully Sharia
compliant operating in the UK (Raza, 2008). Thus, the UK comes in the foreground among the
European countries that offer Islamic banking services.
The fully Islamic banks in the UK are:
• Islamic Bank of Britain plc (IBB).
• ABC International Bank plc.
• Bank of London and the Middle East plc (BLME).
• European Islamic Investment Bank plc.
• Gatehouse Bank.
• In addition to these banks there is a group of UK financial institutions which offer
Islamic financial services such as The Ahli United Bank (UK) plc, HSBC Amanah
Finance, and Lloyds. TSB (McKenzie, 2009, p.1).
However, according to Foster (2009), the potential wealth locked up in oil-rich Gulf countries
encouraged the conventional banks to enter the Islamic finance field.

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Islamic finance has developed rapidly in the UK over the past few years, and according to
Timewell & DiVanna (2008) the UK comes eighth in the rank of total Islamic assets worldwide
with over $18 billion (see table 1); it is the highest ranking country of all western countries.
Table 1: Top countries by value of Shariah compliant assets $bn, 2008
Source: Timewell & DiVanna (2008), Top 500 Islamic financial institutions.
.
Moreover, a study has been done by Ahmad (2008) that states that Islamic banks operating in the
UK have not been affected by the current financial crisis, despite the fact that the prices of stocks
in many banks in the UK are in retreat in the midst of the recession, strengthens the position of
Islamic finance in the UK. However, from my point of view, the current financial crisis has also
hit the Islamic sector, but Islamic banks are better able to withstand it because of their more
conservative stance.
Also, according to HM Treasury (2008), the UK Government will continue to support the
development of Islamic finance in the UK, to the benefit of UK consumers and taxpayers alike.
However, this could be one reason for such support. On the other hand it could be, as some
studies have stated, that one of the reasons for the current financial crisis is the deregulation in
the financial system. As previously established, Islamic finance is well regulated and supervised
by the Islamic scholars. This suggests Adam Smith’s assumption that free-markets are inefficient
Rank Country Shariah compliant assets $bn
1 Iran 235.3
2 Saudi Arabia 92
3 Malaysia 67.1
4 Kuwait 63.1
5 United Arab Emirates 49.1
6 Bahrain 37.4
7 Qatar 21.0
8 United Kingdom 18.1
9 Turkey 15.8
10 Pakistan 6.3

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is correct (Foster, 2009). Another reason for such support could be that the UK government
wants to attract more wealth from the oil countries to enhance its economy, by allowing this
enormous fund to move into the UK financial system, rather than move outside it to another
European country.
To sum up, the UK government and the City of London are actively promoting the Islamic
financial industry, and the innovation and flexibility of the UK financial system, in addition to
the historical links with the Middle East, will pave the way to make London a global centre for
Islamic finance, or at least to be the centre of the Islamic finance in the west in the short run.

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9. The case study of the Islamic Bank of
Britain plc (IBB)
In this study the growth of the Islamic Bank of Britain plc (IBB) will be taken as a case study.
This bank has been chosen for two reasons; because it was the first purely Sharia compliant
retail Islamic bank to operate in the UK in the 21st century (Islamic Bank of Britain Plc, 2010)
and it is the only fully Islamic bank that has a branch in Manchester, where the author lives.
9.1 Overview of the Islamic Bank of Britain plc (IBB)
The bank was the first fully Islamic bank in the UK to be authorised by the Financial Services
Authority in 2004 (Islamic Bank of Britain Plc, 2010).
The IBB has its headquarters in Birmingham, which is the home of the largest Muslim
community in the UK; it opened its first branch in central London in September 2004 (BBC
News, 2004), and by 2010 it had eight branches around the United Kingdom (Islamic Bank of
Britain Plc, 2010).
The IBB was launched on the London Stock Exchange (AIM market) on the 12th of October
2004; the aim of the bank is to aim to provide a friendly, inclusive, and personal service for all
its customers. Also, the bank is a member of the Financial Services Compensation Scheme
(Islamic Bank of Britain Plc, 2010).
The bank provides many services, such as saving accounts, current accounts, personal and home
finance, and business banking in a Halal way; also, it provides an online and telephone banking
service (Islamic Bank of Britain Plc, 2010).

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9.2 The number of branches
As stated above, the bank has eight branches throughout the UK, which is a very humble
network in terms of geographical expansion in a country of more than 61 million, 2.4 million of
which are Muslims (Kerbaj, 2009).
The bank stated that it would “open branches throughout the UK, wherever there are significant
concentrations of the Muslim community” (Islamic Bank of Britain Plc, 2010), while almost all
researchers and studies state that Islamic finance and banking are for both Muslims and non-
Muslims.
However, despite the fact that the target group for such banks are Muslims, they should have at
least one branch in the centre of each big city, with an outstanding image and services, in order
to attract the attention of non–Muslims and Muslims alike to this industry. The reason for this is
that in the end they are commercial institutions, not religious charities.
In addition, the lonely branch of the IBB in the third largest city in the UK (Manchester), is
located in neither a wealthy nor a commercial area (Longside), though it is easy to find huge and
crowded mosques in the heart of the city centre and in several wealthy areas.

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9.3 The image and customer service
IBB branch in Manchester.
Source: (Al-Taher, 2010).
During a visit to the branch it was observed that there are some issues regarding the bank’s
image and its services.
First, the exterior and interior image of the bank looks modest, not exceptional. It is of vital
importance to have an impressive appearance in order to attract people to any unknown and new
service or good. Wilson (1997) claims branding and image are of some significance when
customers chose to place their financial business with a particular bank, rather than another.
For instance, recently Barclays bank has opened a new branch in the city centre of Manchester,
where hundreds of thousands of people pass by every day, of different sex, race, colour, and
national origins, including a significant number of international students, including Arabs,
Muslims, and non-Muslims, due to the existence of three large universities nearby.
Due to the exceptional image of Barclays bank in this area, I and some of my friends have
decided to open a bank account in the bank. In fact, it is an injustice to compare one of the
largest banks in the world, with a new bank such the IBB, even though image plays a vital role in
attracting customers.

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Also, this can be proven through many studies have been done in this field, for instance a study
carried out by J.D. Power and Associates (2009), found that the “most important driver for
selecting a bank is bank's brand image”
Also, some questions have been raised about the customer service person at the IBB bank, in
regards to opening a bank account.
When speaking to her you feel that she does not want you to open a bank account. However,
after she was told that I am student, she said, we cannot open a current account for the students
because they do not work! Then she added, your salary should be transferred to the IBB bank if
you are working. She continued by saying, also the saving account we have will not be useful for
you because you will not get a debit cards, thus you will not be able to use the cash machines.
To sum up, the customer service representative had decided that I am not entitled to open a bank
account because, as a student, I am not working. She should have asked whether I am working or
not before making such a decision.
The most important matter here is that what the customer service representative affirmed is in
disaccord with what the bank declares in the media: “Islamic bank of Britain Provide banking
services to Muslims in the United Kingdom & other parts of Europe” (HEMSCOTT, 2010), and
“The bank intends to offer its services to Muslims across Europe” (BBC News, 2004).
The bank also states in its official website that “UK non-residents who require banking services
while in the UK can now take advantage of banking services from Islamic Bank of Britain, the
UK’s only totally sharia’a compliant British bank” (Islamic Bank of Britain Plc, 2005).
The question remains, do the people working in Europe and the UK non-residents have to
transfer their salaries to the bank in the UK in order to benefit from its services?!
Furthermore, the dialogue reported above was carried out without any smile from the
receptionist, which reflects a lack of proficiency with dealing with the customers.

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However, when the same question was asked of Barclays and HSBS banks they offered a warm
greeting in terms of customer service, and the condition of “Working” was not required in order
to benefit from their Islamic current accounts.
9.4 IBB Islamic products
Despite the growing numbers of Islamic banks in the United Kingdom, there are still few retail
products available. In this section the limited range of IBB products will be reviewed.
The IBB Home Purchase Plan
The Islamic Bank of Britain’s Home Purchase Plan follows the Islamic financing principles of
Ijara (leasing) and Diminishing Musharaka (partnership). This plan allows the customer and the
Bank to both contribute to purchasing the property and effectively become partners. The
customer can then make monthly payments and eventually purchase the bank’s share. As each
repayment is made, the bank’s share in the property is reduced and the customer’s is increased
until the agreement is completed and the customer owns the property out-right (Islamic
Mortgages, 2010
However, is this home purchase plan competitive and in compliance with Shariah?
).
First, based on the purchase agreement, the Rent Rate = Base Rate + a margin of 4.25%,
currently 4.75% (Islamic Bank of Britain Plc, 2010). Thus, according to the IBB, it seems that
the margin is variable, which indicates it is based on the UK interest rate, hence there is no
difference between this purchase plan and a conventional mortgage.
Second, according to the Islamic Bank of Britain Plc (2010), the minimum finance offered is
£100,000, while in any conventional bank the minimum finance offered is much less than this
amount, which makes it uncompetitive with the market.
Third, the minimum term for this agreement is 7 years (Islamic Bank of Britain Plc, 2010),
which means the bank wants to guarantee a minimum return before the client can buy the house.

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Current account
According to Islamic Bank of Britain Plc (n.d) the current account is a loan to the bank, which is
used by the bank for investment and other purposes and it has to be paid back to the client, in
full, on demand. And obviously there is no interest rate paid or received.
However, there are some disadvantages to this account.
First, the client’s salary must be paid into this account (Islamic Bank of Britain Plc, n.d), while
no conventional bank asks for this condition.
Second, an initial deposit of £500 must be made (Islamic Bank of Britain Plc, n.d), while many
people could not afford such a large deposit.
Third, in an interview conducted by the writer, the client cannot have a debit card for this
account. This means that the client has to open an account with a conventional bank to have a
debit card for his everyday transactions. Thus, as the client has to use a conventional bank, there
is no point in having an account with this Islamic bank.
Fourth, the IBB will charge the Client £15 for any letters sent by the bank to the client advising
of any mismanagement, moreover, clients will be charged £2 when using an IBB counter to
make a deposit of cash or cheques, a withdrawal of cash, or a transfer of money to either an IBB
or other bank account (Islamic Bank of Britain Plc, n.d). Thus, it can be seen by what kind of
unfair means this bank is providing services.
In addition, the bank provides other kinds of products such as, savings accounts, personal
finance, and telephone banking.

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9.5 The number of employees
Table 2: The Average number of employees and their wages and salaries in £ million at IBB for the
fiscal years 2004-2008.
Date 2004 (5 months) 2005 2006 2007 2008
Average number of
employees
63 102 144 175 147
Wages and salaries (£million) 779,777 2,914,193 3,777,164 4,344,913 4,323,265
Source: IBB final results for 5 month period 2004 and annual reports & financial statements for the years
2005-2008.
Over the first 17 months, from 2004 to the end of 2005, the number of employee almost doubled,
rising from 63 to 102, which is a logical result of the bank’s expansion of operations and its
increasing number of branches.
From 2005 to 2007 there was an overall increase in the number of employees. This was followed
by slight interruption in 2008, when numbers fell slightly from 175 to 147, which leaves the
question of whether or not the bank is growing. Since the bank is still in its expansion stage, it
should not reduce the number of employees.
There was gradual increase in wages and salaries from 2005 to 2008, but the increase was not as
fast as the increase in the average number of employees.

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9.6 The assets
Table 3: Property and equipment, and total assets at IBB for the end of years 2004 to 2008 in £
Date 2004 2005 2006 2007 2008
Commodity Murabaha and
Wakala receivables and
other advances due from
banks
47,022,681 78,037,676 100,286,964 141,768,471 151,687,736
Property and equipment 3,547,073 3,798,951 3,965,370 3,443,355 3,265,745
Total Assets 51,004,026 89,289,500 118,012,095 164,936,827 180,799,300
2005-2008.
Table 2 shows the total assets of IBB and their sources for five years. Generally speaking, there
was an overall growth in the value of total assets. The figure for property and equipment
remained fairly stable hovering at around £3.6 million throughout the five years despite a slight
decrease in 2008.
On the other hand, the value of Murabaha and Wakala receivables increased steadily from just
£47.022.681 million in 2004 to £151.687.736 million in 2008, which accounts for most of the
growth in total assets.

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9.7 Ownership equity
Table 4: Ownership equity after all adjustments, and retained profit & losses account at IBB for the
end of second fiscal year 2004 to 2008 in £.
Data 2004 2005 2006 2007 2008
Total Equity 47,014,047 40,564,540 31,731,287 24,825,309 18,943,536
Retained deficit -5,923,208 -12,372,715 -21,205,968 -28,137,072 - 34,046,165
2005-2007.
As can be observed from Table 3, the IBB has had uninterrupted poor performance over the five
year period 2004 to 2008, which has led to cruel losses to the bank. The retained earnings have
been negative since the first year, which has created a deficit. Following a big loss during the
first year there was a steady, dramatic increase in the bank’s deficit, which reached £34,046,165
by the end of 2008.
As a result, by the end of 2008 the bank had lost more than 60% of the money that was originally
invested by the original shareholders, which mean that in the event of a company-wide
liquidation the shareholders will receive only18, 943,536 instead of 47,014,047 the amount
which has originally invested. Also, according to the bank’s financial reports there were no
dividends during the whole five years, which is a logical result.

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9.8 Market Value
Table 5: Share price, market value, and number of shares at IBB for the end of second fiscal year 2004
to 2008 in unmodified £
2005-2008 and YAHOO FINANCE data on share prices
.
The table shows the market value of the IBB from 2004 to 2008. As can be seen, there were
additional shares issued from 2004 to 2005. However, after the first actual operating year 2005,
the general trend was downwards and ended the year in 2008 at £25,140,000, a decline from
£121,510,000 in 2005. This decline indicates that the bank had lost 79% of its market value in
three years. Here it should be noted that that the market value is always given as a snapshot, and
does not measure the average market value over time.
9.9 Turnover (revenue)
Table 6: Revenues at IBB for the end of second fiscal year 2004 to 2008 in unmodified £
2004 (5 months) 2005 2006 2007 2008
Revenues 676,398 2,207,961 3,010,979 4,696,862 4,928,210
2005-2008.
Indeed, the figures above show that there were steady increases in the bank’s revenue over time.
However, just reviewing the turnover gives only half of the pictures in terms of profits, since the
costs for the bank have increased as much, and more.
Data 31/12/2004 31/12/2005 31/12/2006 31/12/2007 31/12/2008
Share price 0.28 0.29 0.16 0.08 0.06
Number of shares 343,705,882 419,000,000 419,000,000 419,000,000 419,000,000
Market value 96,237,646 121,510,000 67,040,000 33,520,000 25,140,000

44 | P a g e
9.10 Number of customers and deposits
Table 7: Number of customers, and total deposits in £, and (calculated) average deposits per customer
£, for the period 2004 to 2008.
Date 2004 2005 2006 2007 2008
Number of customers N/A 14,023 30,814 42,000 47,000
Deposits from customers N/A 47,714,593 83,853,383 134,640,612 158,000,000
Average amount of
deposits from each
customer
N/A 3403 2721 3206 3362
2005-2008, and IBB's website.
As can be seen in table 7, in general the numbers of customers and their deposits have been
growing during the five operating years; however, during 2008 the increases in the number of
customers and their deposits were not sufficient in comparison to the previous years, which
confirm the poor performance of the bank, especially in 2008.
In addition, the figure above does not tell much of the real situation of the bank in terms of
growth; in particular, the average amount of deposit does not tell us whether the deposits came
from new or old customers or from major IBB shareholders.
At this point, it important to include the statement the bank released on its financial summary on
30 June 2005, that, “Customer deposits increased to £33.9m (as at 31st December 2004, £2.1m)
inclusive of £14m deposit from major IBB shareholder” (Islamic Bank of Britain Plc, 2005).

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9.11 Review
In fact, it is not easy to determine whether the IBB has grown or not in terms of size when
depending only on the available information and data; however, the available information and
data do give an indicator and general view of the bank’s growth and its performance.
There is a conflict in the available figures and results; while the numbers of customers and
branches have increased, as well as assets governed by the bank, which would be a sign that
there has been growth, the bank has reduced the number of employees for the same period. This
could mean that the bank is struggling to afford the costs for the 28 employees. In addition, the
market values of the company and the ownership equity have plummeted steadily downwards.
The simple answer regarding falling rate of ownership equity is that the bank is expanding, and
investing more money than it is making to build up the bank, and the humble number of branches
can confirm this!
However, an important question arises at this point, which is why has the market value declined
so much (by 79%)?
Indeed, there are several possible answers; first, an external factor, which is the current financial
crisis, has affected the whole financial sector in the UK and the whole world economy. Despite
the fact that this would be right, the bank is still on its launching stage, and was not involved in
any the causes of the crisis, such as toxic assets, subprime mortgages, or the fluctuations of the
interest rate; thus, the losses should not be this much.
Second, the fact that the bank was unable to turn losses into profits during five working years,
due to its poor management.
Third, it could be to the lack of a clear marketing strategy or the bank’s abstention from
financing advertisement and promotions programs.
Fourth, it could be that retail Islamic banks are unable to grow and it is an unprofitable industry
in the United Kingdom. However, it is too early to form such opinions.

46 | P a g e
In addition, the limited range of Islamic products available and the bank’s very strict conditions
leave Muslims without a real choice for fulfilling most of their financial needs.
In conclusion, it is enough to say that the value of the IBB has sharply declined during its first
five operating years.

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10.Research methodology
As the main aim of this research is to present an analytical framework for Islamic banking in the
United Kingdom from a marketing perspective, in addition to a number of objectives that were
affirmed earlier, the next step is to determine how the aim and objectives will be achieved.
These will be achieved through the completion of the following steps:
10.1 The Literature review
The literature review is the first step in this research as it will help the reader and the researcher
gain knowledge and understanding of the concept and the main principles of Islamic finance; this
knowledge is also important to explaining why marketing this industry is a vital issue and how it
would be beneficial to the community and to the whole financial system. The literature review
will also identify some wrong practices and threats that would negatively affect this new market,
which is the UK.
Also in this part it is important to bring the reader up to date on current literature about some of
the main challenges from different points of view.
However, as the majority of the previous studies in this area of finance have focused on
presenting the glossy side of this industry, I will be more critical and investigative regarding
some issues of this modern industry in order to be unbiased and to present a relatively
comprehensive view topic. Here it is good to mention that the modern Islamic industry will be
criticised only, since the core of Islamic finance (form the Islamic point of view) cannot be
criticised as its main principles have been set by Allah (God) and his messenger prophet
Muhammad (peace upon him).

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10.2 Case study
The second step will be the case study of the Islamic Bank of Britain (IBB). In this case study the
growth of the IBB will be measured, in order to determine whether the first purely retail Islamic
bank in the UK is growing or not.
It should be noted that this case study will only focus on the growth in the size of the IBB. Thus,
it is important to note that some performance measurements will not be used, such as return on
assets, return on equity, productivity per employee, etc.
The question now is, how will the growth of the bank be measured?
To evaluate the growth of this bank the following aspects will be looked at:
The number of branches will be examined in order to evaluate its geographical spread and the
bank’s image and its customer service will be compared with some conventional banks operating
in the UK. After this, the increase of the number of employees will be measured in comparison to
their salaries and wages.
Following these three steps, the bank’s assets, the ownership equity, and its revenues will be
analysed, in order to gain insight into the growth of this bank.
Another important measurement that will be taken in account is the bank’s market value; this
analysis will show its potential future growth. This measurement has been chosen because when
they select stocks some investors look at a company’s market value (Hagstorm, 1999, p. 65).
Also, the number of customers and deposits will be looked at.
All these measurements will be used to give the best possible view of the growth of this new
industry represented by the first fully retail Islamic bank to operate in the UK in the 21st
century.

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10.3 Questionnaire
The third step in this research will be a questionnaire. Since the main aim of this study is to
present an analytical framework for Islamic banking in the United Kingdom from marketing
prospective, an assessment of people’s opinions is important.
The questionnaire is intended to give an overall idea of the extent to which Islamic banking is
known in the UK.
The data were collected through a self-administered questionnaire. The questionnaire sought
responses from a cross-section of Salford University students. The utilizable data (n = 159) were
collected from a survey distributed to 500 undergraduate and postgraduate students. Also,
about10 percent of the data were collected from some prayers at the Salford University mosque;
while a sample of 159 students is very small in relation to actual UK population, the sample size
is deemed sufficient for the study since Sekaran (2003) stated that “a sample that is larger than
30 and less than 500 is appropriate for most research”.
The university students have been chosen as a sample since they reflect different social-classes,
regions, races, religions, ethnicities, and backgrounds. The questionnaire, together with response
frequencies, Crosstabulation and descriptive statics, is shown in appendix 1 and 2. In order to
summarise the findings of each question the cross-tabulation techniques of the SPSS program
will be used. Also, the Chi-Square statistical test will be used to compare observed data with
data we would expect to obtain on the topic, to see if there are any significant relations between
some pieces of data.
The questionnaire included 14 questions and consisted of four parts. Part A sought information
from students regarding the following demographic factors: gender, age, religion, and level of
education.
Part B, asked closed-end questions, in order to give an overall idea of the extent to which Islamic
banking is known in the UK. Part C sought information of knowledge and awareness of Islamic
banking in general and its products in particular. Part D, asked questions about the respondents’
attitudes to the word “Islamic” in reference to Islamic banks.

50 | P a g e
10.4 Data collection
A triangulation method will be used in this research since it involves the careful reviewing of
data collected through different methods in order to achieve a more accurate and valid estimate
to the related topic (Hoyo, Allen & Dee, 2006).
The data will include various sources, such as data from a questionnaire, books, case studies,
company reports, statics, articles from journals, research papers submitted to universities and
other publications; in addition to these it will use some electronic mediea sources available on
the internet, as well as quotations from people about their experiences and beliefs about Islamic
finance. Finally, observations of and live visits to some banks, and some visual data such as
photography will be used; the combination of all of these data sources will allow for a
comprehensive study and result.

51 | P a g e
11.Results and discussion
Table 8: Frequency Table
Descriptions Frequency Percentage Cumulative (%)
Gender
Male
Female
95
64
59.7
40.3
59.7
100.0
Age
Under 18
18-20
21-24
25-30
More than 30
2
41
46
48
22
1.3
25.8
28.9
30.2
13.8
1.3
27.0
56.0
86.2
100.0
Religion
Muslim
Non-Muslim
98
61
61.6
38.4
61.6
100.0
Education Level
Undergraduate
Postgraduate
102
57
64.2
35.8
64.2
100.0
Source: primary data.
As can be seen from the Frequency Table above, the data consists of responses from 159
persons, 95 male and 64 female. With regard to the education level, most (64.2 percent) of our
respondents are doing an undergraduate degree, while only 35.8 percent of the sample is doing a
postgraduate degree.

52 | P a g e
The respondents are divided into five age groups: while people under the age of 18 represent
1.3% of the sample, the largest group were from the ages of 25-30 years-old (30.2%); also
people who are between the ages of 21-24 represent 28.9% of the sample and 25.8% of the
people are between the ages of 18-20. The rest are over 30 years old and account for 13.8% of
the sample.
The researcher intended to focus on the 25- 30 year-old category because a study carried out by
Khan et al. (n.d.) shows that most of the customers of Islamic banks are between 25- 35. But in
this study the researcher has contracted the age range to 25-30 from 25-35, in order to get more
specific results.
The third questions, asked about the religion, are you Muslim or Non-Muslim? In this survey the
religion is very important since it wanted to know whether the unawareness of Islamic banking
in the UK is limited to non-Muslims, or if it is true for Muslims as well, as has been suggested.
Muslims account for 61.6 % of survey participants, while 38.4 % were non-Muslims.
The logical result that has been found in this survey is that 62.9 % of the respondents say they
have heard about Islamic banking (see appendix 2); however, this could be due to the fact that
61.6 % of respondents are Muslims.
In this survey it has been found that 54.10 % of participants know the difference between Islamic
banks and non-Islamic banks (see appendix 2). In this context, it is good to mention that 46.20%
of the female respondents and 44.9% of male respondents have heard about Islamic banking.
However, when the Chi-Square test was used to determine whether the association between
female and male respondents who had heard about Islamic banking is significant or not, the
result was as follows:
x2
This indicates that, the relation is insignificant.
= 1.589, df = 2, p > 0.05
On the other hand, the most surprising result was that 70.7 % of the students between the ages 18
and 20 have heard about Islamic banking, while the figures for the other age groups are as
follows: for 25-30 years of age, 66.7 %; for 21-24 years of age, 58.7 %; and for those over 30
years of age, 50 % (see appendix 2). However, it seems that if we stretch the age group of 25-30

53 | P a g e
to include those over 30 or to include those aged 25 to 35, it will show a higher percentage,
which supports the findings of Khan et al. (n.d.), which were discussed above.
Another important question that was asked in this survey is, have you seen any advertisement for
Islamic banking products in the UK?
From the table above it can be seen that 7.5 % answer yes and 19.5 % answered Yes, but I
cannot remember. This is further proof that a heavy marketing promotion is needed in order to
raise awareness of this industry. From the other side , this result explained what have conclude
in the case study of IBB earlier which is the bank is not growing in size , which is a logical
result as the majority have not seen any advertising or promotion for the bank, thus how this
bank will grow.
In related to this, a question about the awareness of any Islamic banks operating in the UK has
been asked and the result was that, 63.5 % are unaware of any Islamic bank operation in the UK.
Thus, how this industry will thrive in the UK!
However, again it seems that the majority of students who are aware if any Islamic banks
operating in the UK are more than 30 years old which count 45.5 % (see appendix 2).
Chi-Square test also employed in this context. The result showed that;
x2
From the above Chi-Square result we can conclude that there is a significant relationship
between the participants’ age and their awareness of Islamic banks.
= 16.085, df = 4, p < 0.05 (see appendix 2.1).
Table 9: Have you seen any advertisement Islamic banking products in the UK?
Frequency Percent Valid Percent
Cumulative
Percent
Valid Yes 12 7.5 7.5 7.5
Yes, but I cannot remember 31 19.5 19.5 27.0
No 116 73.0 73.0 100.0
Total 159 100.0 100.0

54 | P a g e
Also, it has been noted that only 10.7 % of the respondents know what products Islamic banks
are offer. Although, when they were asked if they could list any of its products, the majority did
not answer this question and left it blank.
One of the fourteen questions in this survey was; do you think that the current banking system
needs to be more ethical?
This question was intended to measure their desire for an alternative for conventional banks, or
in other words, to find out whether the participants were satisfied with the conventional banking
system or were looking for a more ethical banking system. 34.6 % of the respondents answered
yes, the current banking system needs to be more ethical, and 47.2 % answered yes, to some
extent (see appendix 2); therefore if we combine the two groups 81.8 % felt that the current
banking system needs to be more ethical. Thus, it seems it is a golden opportunity for the Islamic
banks to focus on the ethical side in their promotions in order to develop their business based on
what their potential customers want; unfortunately they Do NOT do this!
The unexpected result here was that 73.7 % of Non-Muslims said the current banking system
needs to be more ethical (see appendix 2), which seems, again, to suggest it the right time for
Islamic banks to start an aggressive marketing strategy to enhance their position in the UK. They
could benefit from such an attitude toward the current banking system, now that the way is
already paved.
Also in this study, Chi-Square tests were utilised to determine if there is a significant relationship
between seeing the advertisement of Islamic banks and the desire to open an Islamic bank
account, the test result was as follows;
x2
From the above result it can be noted that the Chi-Square test assumes a significant relation
between seeing the advertisement and the willingness to open an account in an Islamic bank.
= 13.064, df = 4, p < 0.05 (see appendix 2.1)
On the other hand, 35.2 % of the respondents have showed their unwillingness to open an
account in an Islamic bank, when they were asked, “Based on your knowledge of Islamic
banking, would you like to have an account with Islamic bank?” (See appendix 2). The good
news here is that only 4.4 % out of the 35.2 % (see appendix 2) said they did not want to open an

55 | P a g e
account in Islamic bank because of the word Islamic, although it should be noted that 30 % out
of 4.4 % were Arab Muslim and they said they felt this way because they think that Islamic
banks only differ from conventional banks in name; also, these respondents had had a bad
experience with Islamic banks in terms of customer service.
In order to understand to what extent the word Islamic has a negative impact on the growth of
this industry, a related question has been asked, as is explained in the following table:
Do you think that the word Islamic in "Islamic banking" would has a negative impact on the
growth of this industry?
Frequency Percent Valid Percent
Cumulative
Percent
Valid Agree 45 28.3 28.3 28.3
Neither agree nor disagree 67 42.1 42.1 70.4
Disagree 33 20.8 20.8 91.2
Strongly disagree 14 8.8 8.8 100.0
Total 159 100.0 100.0
As can be seen from the above table, only 28.3 % agree that the name will have a negative
impact, while 42.1 % neither agree nor disagree; here it should be noted that the majority of the
respondents have said they neither agree nor disagree due to the fact that they have no idea of
what Islamic banking and finance is. The rest of the responses ranged between disagree to
strongly disagree. Thus, again it seems that the name Islamic is not a barrier to the growth of this
industry.

56 | P a g e
12.Conclusion
In general, the Islamic financial system possesses, in principle, the essential elements that qualify
it as a competitor to the conventional financial system, if it meets the challenges facing the whole
Islamic industry.
First, although London is leading the race as the major western centre for Islamic finance so far,
and despite the support of both the Financial Services Authority and the UK government, the
development and the performance of Islamic banking has been disappointing.
Second, despite of the wide acceptance of this industry among the UK Muslim and non-Muslim
populations, and the need for an ethical alternative to the current banking system was proven in
the survey, Islamic banks so far have basically failed to serve the United Kingdom’s Muslim
community; this failure, then, begs the question of how it would serve the non-Muslim
community on retail basis.
Third, even though London has been providing Islamic financial services for three decades
(Cahn, 2007), there are still limited ranges of retail Islamic products on offer, and it seems that
the UK Islamic banks are reluctant to take the initiative by promoting Shariah compliant
products for the local market. Furthermore there are no hopeful signs for the future promotion of
such products. At this point it is good to clarify that this situation has not come about because
Islamic finance is conservative and not able to accommodate the evolution and the development
of the 21 century and the needs of the UK community, but to the very conservative
mismanagement of the people who have the power over these Islamic retail banks in the UK.
Fourth, Islamic banking in the UK also has great challenges due to its potential customers’ lack
of awareness of Islamic banking; for example, some major UK retail banks that have Islamic
windows, such as HSBC bank that has branches in Arab countries, have adopted a heavy
marketing strategy in order to promote this promising industry and enhance its profitability,
while in the west the idea of Islamic banking is relatively new and you do not see any further
steps in regards to marketing, which is really required.

57 | P a g e
For instance, you can see on the front page the HSBC website in the Arab countries a promotion
for Islamic products, while on their UK website, despite the large number of Muslims in
residence who are looking for Islamic financial products and services that comply with their
faith, it is difficult to find information about the Amanah Islamic account. This is a striking
paradox!
Also, this could be one of the reasons why the first fully Islamic bank operating in the UK in the
21 century (IBB) is not growing in size, as was stressed in the case study.
Fifth, during some visits to the banks that provide Islamic services in the UK, it was found that
there is a lack of experience and knowledge of Islamic finance among the employees of these
banks. Also, the response of their staff when they were asked about opening an Islamic account
was quite astonishing.
Also, during the research it has been noted that one of the vital problems in the development of
Islamic banking is the lack of good and trained customer service representatives in the purely
Islamic banks.
Last, but not least, despite the fact that the importance of Islamic scholars is outstanding for the
development of this industry, it has been observed that there is a lack of qualified Islamic
scholars in this sector and because of this shortage it is difficult to modernise this industry. Thus,
sooner or later this problem will affect the growth of Islamic banking in general and in the UK in
particular.
The Islamic banking and finance industry will not develop and grow as long as it cannot stay true
to its principles.

58 | P a g e
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