The Intermediary speaks with Sagheer Malik about the growing popularity of Islamic finance, Offa’s new buy-to-let offering, and modernising Islamic finance for the 21st century.
How has Offa modernised Islamic finance, and what specific benefits does this bring to customers?
I’ve been in the industry for about 18 years, and there is a poor reputation in the market right now for Islamic property finance.
The reputation in the market for trying to get property financing from Islamic banks, is that it’s a very long and onerous process – that there is this massive list of documentation that everyone has to provide, and ultimately that it’s an old-fashioned process.
At Offa we’ve tried to reinvent Islamic finance for the 21st Century. What that means is that for many of our customers is that they won’t have to provide any documents at all. Our systems will pre-generate, based on risk-based underwriting, what level of documents our customer needs to send, if any.
Also, in terms of underwriting, we try to automate it as much as possible so some cases will be approved without any underwriting– and even if a case needs to be underwritten, it is ideally minimal so we can make very quick decisions. This is almost unheard of within the Islamic finance market.
What we are doing now is completely paperless, we don’t require any papers to be submitted to us and everything can just be uploaded. But the key thing for us is to make the whole process as easy and quick as possible.
Offa is trying to disrupt the market by reinventing it – and this is what we’ve done with our bridge products. Bridging is all about speed, and as the first and oldest Islamic bridge provider, we’ve been successful at doing that.
Now, we’ve used the same kind of ethos, and we’ve applied it to our buy-to-let proposition. We’ve made a point of putting the customer first and making sure that our processes are end-to-end digital, fast, smooth and easy for customers.
What factors have contributed to the growing popularity of Islamic finance in the UK?
Interestingly, 44% of our customers have been non-Muslim. This is because of our speed and service and the reputation that we have in the market.
But generally, what’s also attracting Muslims and non-Muslims to Islamic finance is that the population generally is more aware of the things happening in the world, and ethics are a bigger part of their decision making.
Islamic finance is ethical by nature and has been ahead of the ethical trend for many years.
In my career, I was offering Islamic ethical finance products before ethics were even a part of the conversation for mainstream financial products.
We don’t charge interest, we don’t invest in sectors that are harmful to society, such as the arms trade, animal testing or alcohol and tobacco – and that’s where we’re ahead of the trend.
The regulator has been catching up with Islamic finance.
When I was originating Islamic Home Purchase Plans (HPPs) early on my career, we used to stress test and complete budget planners on all residential home finance applications before it was mandatory, and we also refused to allow brokers to underwrite for us. Then all of that became the norm after the Mortgage Market Review.
We’ve been ahead of the trend, and I think customers are finally realising that.
In addition, there are certain things that are quite important to them that are innate within Islamic finance.
I feel like there’s a bigger trend now where people feel like they want to support the industry so we can continue influencing the mainstream markets, pushing them to be more ethical.
Having been involved since the initial boom in Islamic finance in the UK, what significant challenges have you observed in the market, and how has Offa addressed them?
The key challenge, as I mentioned, is that Islamic finance has historically done things in a very old-fashioned way, which has led to a lot of frustration for customers.
As the rest of the industry has moved on to become paperless and more tech focused, Islamic finance generally has been quite slow to catch up to it. I remember when an Islamic bank was among the top three banks in the country with the most mortgage complaints. I remember those days, and the cause of it was ultimately the onerous processes – and that’s what we’ve come in to fix.
Not too long ago, the number one reason for complaints for Islamic mortgages was about conveyancing. With some Islamic mortgages, it was a requirement to have two sets of lawyers, one that acts on the bank’s behalf and one that acts on the customer’s behalf.
That used to cause so many complaints; there used to be debates or arguments between the two lawyers and there used to be huge delays as they sent information back and forth.
I think this is still the case for a lot of Islamic finance providers, but we’ve got rid of that altogether. Now, it’s just going to be one lawyer who can act on both Offa’s behalf and the customers behalf, thereby reducing the time and confusion involved in completing cases, improving the service and cost for the customer.
Muslims are effectively having to take Islamic finance to remain in line with their faith. But to keep true to the faith, they shouldn’t be punished with poor service. Unfortunately, that’s the way things seem in the industry right now when it comes to taking out property finance.
As a practicing Muslim, I know first-hand what it’s like to be that customer. I don’t want to deal with poor service, and I certainly don’t want my family or friends to go through it either.
At Offa, we want to ensure that people aren’t penalised for staying true to their faith when seeking financial services. They shouldn’t have to sacrifice service quality just because they choose faith-based finance; in fact, they should receive service that’s as good, if not better, than conventional finance options.
What are the advantages and disadvantages of using Sharia-compliant property finance?
The advantages generally are that we don’t invest in anything unethical and we put the customer first. It’s very difficult to find a bank nowadays, or a financial institution, that doesn’t invest in things like weapons.
Regardless of your politics, I doubt many people would be comfortable knowing their money funded a bullet. A lot of people are unaware of this, but I think awareness of that is increasing day by day.
Islamic finance, from the beginning, has never invested in such companies and has consistently refused to do so.
Another advantage of using Islamic finance is that we always put the customer first.
We try not to charge penalties to our customers, but if we have to, it is purely there as a deterrent. Any profits made from the penalties have to be donated to charities.
One of the benefits of supporting Islamic finance is that as the industry grows, it will have greater influence on making the wider financial sector more ethical. That’s what we want, to create a more ethical and fair system for everybody. That’s the mission.
Islamic finance is also a much fairer risk-based financing system, everything we do is asset backed.
A lot of the issues that we had with the financial crisis were rooted in the interest-based system, which involved forward selling and excessive speculation. Such financial instruments are forbidden in Islamic finance, as our transactions have to be asset backed.
Even the Government and Treasury operations are incorporating Islamic assets to mitigate risks, emphasising the use of lower risk financial tools.
I think the main disadvantage in the market is that generally Islamic finance products tend to be a bit more expensive than the cheapest products available from conventional banks and lenders. That’s mainly because of the cost of funding.
Because our cost of funding is expensive, certain financing products, like a buy-to-let for example, can be a bit more expensive than the cheapest products available from conventional lenders, but they’re still competitive.
When we announce the rates for our buy-to-lets, you will see that they are definitely competitive with the market. But we can’t offer them the lowest rates on the market because our cost of funds is higher compared to conventional banks and lenders.
As the industry grows that will improve, and we’re lobbying the Government so that we can get access to cheaper funds, so that ultimately, we can pass those savings on to customers.”
How does Offa’s new buy-to-let product work, and what benefits does this offer to customers?
The new buy-to-let offering is a flexible and wide-ranging product. Unlike a conventional mortgage, we don’t lend any money at all. Instead, both Offa and the customer will acquire the property together in a joint ownership.
Each month, as they make payments, their share in the property will increase until they eventually own it outright. We set up a lease on our share of the property and then the customer pays rent to us.
It’s not just open to UK residents, it is also open to UK citizens who live abroad, especially expats that live in the United Arab Emirates (UAE), Saudi Arabia, Qatar, Kuwait, Bahrain, Australia, the EU, Canada, Singapore and Brunei.
We understand what kind of documents customers can provide in those countries, where a lot of banks struggle with that. We’re majority owned by a UAE company, and we understand how the market works. I have a lot of experience in dealing with British expats in those areas, and we’ve had a lot of interest already.
The product is open to customers aged 21 and over in England or Wales with a property value of £60,000 up to £1m.
We also allow first-time landlords and those with houses in multiple occupation (HMO) or a multi-unit freehold block (MUFB) to apply in a personal name or limited name, and it’s the same for UK residents and British expats.”
What is the future outlook for Islamic finance in Britain?
Offa is determined to keep innovating and keep disrupting the market with the fintech, tech-first approach. Our main goal is to for customers to receive speedy service and quick decisions with minimal paperwork.
We have exciting new and flexible products on the horizon, which will help us achieve this including some products that have never been seen before.
We are also working closely with regulators on new developments. For instance, we are currently restructuring certain bridge financing products to align them more closely with the principles of Islamic finance.
On the buy-to-let and consumer retail side we are also working to bring other innovations into the market. The goal is to secure more affordable funding, expand the range of Sharia-compliant products available, and ultimately pass on these savings to our customers.
There’s other work going on from a taxation perspective to make the market more attractive for customers to take out Islamic finance, so there’s a lot of work going on in the background.”
