This article was originally published in Islamic Finance News, 11 January 2017.
In November 2016, Al Rayan Bank opened its inaugural branch in Scotland, becoming the first Shariah compliant bank to establish itself in Scotland and presenting its 2,000 existing customers with an opportunity to interact with Al Rayan Bank up close and personal in Scotland whereas before they had been limited to only using online and telephone banking channels. To coincide with the branch opening, Al Rayan Bank also launched its ‘Home Purchase Plan Scotland’ which uses a diminishing Musharakah or co-ownership structure to allow individuals to purchase homes in Scotland under the terms of a Shariah compliant co-beneficiaries agreement.
Of the many Shariah compliant structures which can be used to fund real estate, diminishing Musharakah appears to be the only type of structure used in Scotland as far as Islamic finance in the retail lending space is concerned. The use of Ijarah or leasing structures where the financier acquires the property and leases it back to the customer for the mortgage term does not appear to have been used in Scotland. There may well be a good reason as a matter of law for this as the Land Reform (Scotland) Act 1974 provides that residential (as opposed to commercial) leases in Scotland cannot be longer than 20 years.
Similarly, Murabahah under which the property is purchased by the financier and then immediately sold to the customer has not been used to any meaningful extent under Scottish law.
In the corporate lending/investments space by contrast, Scotland has seen greater Shariah compliant activity with Gatehouse Bank (a wholly Shariah compliant bank) having acquired student accommodation Fountainbridge in Edinburgh for GBP 20m (USD 24.53m), a Rolls Royce manufacturing facility in Glasgow and an office property in Aberdeen let to Petrofac. Aberdeen Asset Management also operates a number of Shariah compliant funds.
While Scotland has made certain advancements at a policy level, the use of Islamic finance in the retail lending space has been fairly limited. Al Rayan Bank’s launch in Scotland ought to help address this. This is particularly so as there is a clear will to develop Islamic finance in Scotland, not least demonstrated by the partnership between the Church of Scotland and the Islamic Finance Council UK, a not-for-profit specialist advisory and development body focused on
promoting and enhancing the global Islamic and ethical finance industry. The two bodies launched an initiative in 2016 to join forces in order to develop ethical financial services, looking to benefit society as a whole, a collaboration which will be interesting to follow moving forward.