Demystifying Islamic Banking


Introduction: Dr Saeed Shehabi: Our host  tonight is HSBC Amanah services and now we move from spirituality to money.

Rezaan Haffajee:  I will start with some background information about HSBC Amanah. It was launched in  1998, the first retail or high street bank to provide Islamic retail services in the UK. 

The HSBC’s Islamic Banking division regional offices in ten geographical areas including the UK.  A range of services have been developed in accordance with Shariah.

Ensuring compliance with shariah is essential. The modes of Islamic finance include Amanah home finance which is the main product which we provide.

The Global Shariah Advisory Board (GSAB) advises HSBC Amanah on research activities intended for further development of the Islamic finance industry. GSAB comprises of representative scholars from all Regional Shariah Committees (RSC) of HSBC Amanah in addition to other Shariah scholars of international standing. The presence of renowned scholars from various geographies at GSAB will provide an opportunity to achieve further harmonization of Shariah standards and practices of Islamic Finance Industry. The following independent Shariah scholars are currently members of GSAB.

HSBC Amanah Home Finance makes it possible to own your home without contravening the guidelines set by our Shariah advisors


The underlying product structure varies by location. In the case of murabaha, we replace an interest-based mortgage with a trade-based solution by buying your house of choice from the mortgage provider and then reselling it to you over a period of fixed instalments. Our ijara product works more like a floating rate mortgage, where we lease the property to you in return for monthly rental payments. Once the lease period is completed, we transfer the title of your new home to you.

The Amanah Home Finance monthly payment will be based on the Amanah Home Finance rate, which is currently 5.83%. It will be collected from your account by direct debit on the 25th of every month.

As determined by the HSBC Amanah Central Shariah Committee, Shariah permits using the conventional market as a benchmark.

Payments will be reviewed on the 1st January, April, July and October each calendar year during the financing term. Any change to the Amanah Home Finance monthly payment (upwards or downwards) will be notified in writing to you.

We guarantee that the HSBC Amanah Home Finance Rate will not be more than 2.5% above the Base Rate (the Bank of England Repo rate from time to time) at the time of recalculation of the Amanah Home Finance Payments

The Amanah Home Finance payment consists of three elements:

  • Contribution Payment providing a monthly contribution toward the purchase price of the property resulting in an increase in your beneficial share
  • Rent, for the use of the bank’s share in the property
  • Other charges, if applicable (Service Charge, Ground Rent and/or buildings insurance, if arranged by the bank)

The Amanah Home Finance payment will be apportioned as follows:

  1. Rent
  2. Charges (if applicable)
  3. Contribution Payment

Rent is calculated by applying the Amanah Home Finance Rate to the purchase price less the Contribution Payments received.


Properties outside  England and Wales are currently not available  and neither are buy to let properties but we are looking to develop that as well.


Amanah also provides insurance services through Takaful,  an insurance system through which the participants donate part or all of their contributions, which are used to pay claims for damages suffered by some of the participants.

Takaful is based on the co-operative principles of Shariah (mutual help and solidarity).

It is the Fund Manager’s role is to manage the Takaful operations and invest Takaful contributions in line with Shariah principles:

  • Mutuality. Contributors own the fund jointly and share in the risks and rewards.
  • Simplicity. The system is easy to understand and encourages participation.
  • The benefit is in terms of receiving compensation for a claim or a share of the surplus, if any.
  • Fairness. The system of takaful recognises the rights of both policyholders (“Participants”) and shareholders.
  • No speculation. Unlike conventional insurance, one party does not try to win a sum from another. There is only one party for taking of mutual loss. If there are no claims, there will be no losses, so all participants benefit.
  • Ethical investment. We invest in assets, companies and businesses that are acceptable within the socially and environmentally acceptable investment principles of Shariah. The Takaful Fund is held in a non-interest-bearing environment.

Islamic law states an explicit preference for equity financing over debt financing. The classical forms of equity financing (musharaka and mudaraba) require partnership and profit sharing, to which the contemporary devices of venture capital, investment management and project financing can be compared.

In financial markets, investing in stocks and equity funds is permitted but must conform to certain guidelines. Not unlike ethical or socially responsible investing, undesirable companies and industries are screened out on the basis of both qualitative criteria (nature of business) and quantitative criteria (level of involvement with interest). Islamic investment also discourages speculation and precludes short selling, conventional debt instruments and conventional derivatives. These views go back to the prohibition of interest, gambling and certain types of uncertainty in Islamic law.

HSBC is looking into assistance with commercial financing.

Muslims have now the option of conducting their financial affairs in a ‘halal’ manner throughout the UK thanks to an extensive network of HSBC Amanah services. I will be happy to answer any questions.


Q: You call one type of financing commercial and the other residential – why is that?

A: It is called residential financing because the bank itself is granting its proportion of ownership of property to you therefore it doesn’t allow subletting because in effect you are renting your proportion of the property that the bank ownes itself.  And that itself if not allowed according to the contract. 

Q:  What criteria do we use when assessing whether someone qualifies for getting Amanah home finance?

A: HSBC Amanah uses what we call an affordability scale. Rather than using salary multiples with the mortgage, if you earn 50,000 some banks say they will give you four times your salary. What we need to bear in mind is that someone may support a lavish life-style and that means they cannot actually afford the finance. We assume that people have a net income and we assume that 40 percent of that is used for the living cost and enjoying their life. The rest is for things like home finance, building insurance, council tax. And that gives you a better idea of whether customers can afford it. We use 60 percent affordability criteria, looking at your income and your outgoings. So we have an idea of whether you as the customer can afford the potential finance.

Q:  Do you deal with people who are self-employed?

A: We do deal with people who are self-employed and those who are salary employed. If you are self-employed we would expect that you would expect  you to have at least two years worth of financial accounts by the financial accountant. We would then assess whether you can afford it based on 60 percent affordability.

Q: Do you do equity releases?

A: I assume that you are asking that if you have a mortgage at the moment i.e if it is 50,000 pounds and your house is worth 250,000 could we release equity up to that in a Shariah compliant way? Yes, we could take hold of mortgage you have and provide finance up to 90 percent of the value of the property ,  between 200,000 and 300,000. This means that whatever equity you have released is yours to keep. The mortgage would then be taken over by us and we would do the re-finance on the basis of the value of the actual property today.

Q: What do you mean by Shairah? How can use the Qur’anic justification.  Quote me a surah. Don’t make a fool of Muslims.

A: I am not going to quote any surah. What I would like to say I am not a shariah scholar. With all due respect my intention in coming here this evening was to make people aware  that there is an alternative. The only way to see if this is a viable alternative is to approach those who are providing it and find out from them. At the end of the day that we believe that each of us must face Allah and if we believe that this is okay for us it is then our responsibility to do it or not.  My intention in coming here today is to make you aware that there is an option which is available.

Q: Okay you are HSBC you are basically a Western bank and now you are providing services for Muslims. And that is commendable. But there are also Islamic banks in Muslim countries which are not tied to Western banks so why is there a need for this. If you look at the world banking system which America controls it is able to stop funds to the Palestinian Authority. If the Muslims really got their act together with this alternative finance they could set up a system outside this system. They could set up something outside the IMF. So I am trying to raise this to the bigger picture.

 A: I think that is a very valid point. Something which Sheikh Fadallah also pointed out is that we are not in an ideal world.  The idea behind banks such as the HSBC, the Islamic Bank of Britain in providing these services is because they are businesses and there is a crying need for services such as this. In terms of the constraints of the legal guidelines in the UK the Shariah scholars have worked within those constraints to find  a product which meets the criteria of the shariah as far as possible. It is not perfect and it will take a while for the industry to grow and provide that to you.

          In terms of your question of what the Ummah can do, in time perhaps that is an option but at ground roots level if it has taken us this long to understand a concept which potentially could help, in time, in sha Allah that could happen, but that is in an ideal world.

A Could I just add it is a valid question of course. We have to be clear about the objectives of Islamic banks and HSBC Amanah being the first high street bank in the UK to provide services that were being provided in the Middle East. Amanah is a dedicated division of the HSBC group. It is not specifically a brand that HSBC has decided it will sell a few products the Muslims. This has been running since 1998 and has expanded into about a dozen countries world-wide. Our objective is to provide Islamic banking solutions. While we can try our utmost to offer genuine Islamic banking solutions we don’t lose our head, we are not here to save the ummah, to solve the problems of today. Of course this is very important to us on the personal. Our business objective is to help you in terms of your banking needs to avoid anything prohibited by shariah, to offer you an option and that is what we are doing. 

Q: You said something about insurance – takafol. If I understand correctly this is  a pool to which everyone contributes and it goes back to the people. But what if more people claim from the pool than is available?

A: It is a pool. People contribute to the mutual takafol fund. The profits and the losses are shared. With investments from insurance pools they are very long term investments and are very low risk so the chances of that happening would be remote.

Q: What is the difference between a mortgage and a home finance agreement?

A: If one were to put a  mortgage and a home finance agreement side by side you would pretty much come out with the same thing. They are based on a similar model. The question that we need to ask ourselves if for example people who are co-habiting. They live together for years, they have children what would differentiate that from marriage. And the simple answer would be the contract which then makes it halal or in line with shariah. In this way what the HSBC and the shariah scholars come together to produce an alternative whereby instead of having a mortgage which interest is charged on and money having no intrinsic value there is the sharing of a tangible asset, the house. That in itself is taking a risk by participating in the ownership of that house. The bank decreases its ownership over time. And as a business it has the right  to make some kind of profit. And because you are living in the property the bank partly owns, it is then deemed okay to charge rental. If yourself and myself were to buy a bicycle together and we both put up 50 pounds but you ride away with it and I did not charge you something for my contribution it would not actually be fair because you are riding it. I would have the right to charge you something. I am using an analogy if that makes sense. It is actually the contract.

          The system that has been put in place is obviously within the constraints of the law within the UK. It has taken us about five or six years to develop these products. On the front line all we see  is what is provided. But in the back we don’t see  the efforts of the scholars and they process they go through to bring these products forward. We need to understand the risk we face of you defaulting. We need to ensure that according to our criteria you can afford it. If you were not able to afford it the bank, as a business, would be placing itself in undue risk.

Q: What would happen if you default and the house is sold? If a house is sold and there is negative equity how would you share the loss?

A:  There are exceptional circumstances in which the bank itself would take on all of the loss. That’s if you as a customer had no other means of providing the finance or  something were to happen to you when you couldn’t work and could not find a way to repay. But if there was negative equity and you then decided because the market was an upturn in the market and you wanted to sell that would not be fair  to the bank  and the bank would not share in that loss. It is your choice to sell it at that point.  At the outset it was agreed that you would enter into this agreement for 10, 15, 20 years and that was from the outset.

Q: Why is subletting not allowed?

A: Because you are living in the property and the bank  is renting it out to you. That how it derives its profit figure. The bank itself does not allow it. As far the rationale  behind subletting  goes it was actually one of the points raised by the shariah scholars that we have on the committee that the aim of the diminishing mushakara  product is to help you finance a home to live in for yourself. It is not to help or assist in an income generating venture. There are different types of Islamic financial tools for that. This product is to help you buy a house. There is currently an issue with Shairah scholars as far as the  shairah legality of a diminishing mushakara contract with a buy to let finance. That is one of the second points that affected our decision.  We want to keep this as pure as possible, as close as possible to the requirements and to the satisfaction of the scholars who we are getting recommendations from. They were happy this is in line with shariah requirements.

          If you were not living in the property and something was to happen to it because to be fair potentially unlike the conventional mortgage where the bank is more protected. In the mushakara with the bank being a joint owner this is another reason.

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