Lord Eddie George - The steady hand behind Islamic finance in the UK

By Tanya Andreasyan

New Horizon met with Lord Eddie George, former Governor of the Bank of England last month. Amidst many achievements, there is no doubt that paving the way for the introduction of Islamic mortgages is something that he looks back on with pleasure and pride. Over an hour and a half, he talked to NewHorizon editor, Tanya Andreasyan, IBS’s founding editor, Martin Whybrow, and former founding CEO of HSBC Amanah and chairman of the executive committee of Jadwa Investment Bank, Iqbal Khan, about the original drivers, the hurdles and the influences for this important element of Shari’ah banking. Where the UK led, others have now followed.

A pivotal individual in terms of laying the foundations for Islamic mortgages in the UK (and beyond) is Lord Eddie George. During his time as Governor of the Bank of England, he helped pave the way for this important cornerstone of Shari’ah-compliant banking. Looking back on these efforts, he is quick to emphasise the team effort behind the development but, nevertheless, the senior backing that he provided was clearly vital to the success of the initiative. Under his steadying hand and guiding influence, all of the necessary elements to turn the dream into reality were put in place.

Having retired in June 2003 after ten years as Governor and 40 years at the Bank, Lord George is now in an ideal position to look back on the evolution of Shari’ah banking in the UK during that time, and to put this into context in terms of other major changes within the country’s banking sector over that period. The tale that Lord George recounts of his initial interest in Islamic banking goes back to before his time as Governor. He met what he describes as a delightful Muslim couple who had just bought their first house. They told him of their happiness with their new home but there was one problem which was preying on their conscience. This was the fact that they had had no option but to take out a conventional mortgage and they explained their issues and sadness. ‘I couldn’t think of any rational reason for this,’ says Lord George. The country has a terrific reputation for innovation, so surely it could find a way to meet this need, he felt.

Lord George looked into the matter at that stage and identified one issue to be the lack of standardisation. Many of the existing financial products seemed to have at least some of the characteristics consistent with the teachings of the Quran and it did not seem too difficult to fit Shari’ah-compliant products into the UK’s legal framework. However, a better and more precise understanding of Islamic banking products was needed, as well as, in the immature area of mortgages, a more consistent and standardised specification of the products required by the Islamic community.

‘There were no really standard products, so we couldn’t identify a Shari’ah mortgage. It was hard to fit this into the regulatory and legal framework because the definition of a Shari’ah mortgage differed from one place to the next.’

The next milestone came out of the Bank of England’s ‘Heart of the City’ charity which was set up in 2000. The overall aim was to encourage City companies to work with surrounding boroughs, many of which are relatively poor. In parallel, Dr Pasha, General Secretary of the Union of Muslim Organisations of the UK and Ireland, had raised the subject once more of Islamic mortgages with Lord George. Out of this came the idea to set up a working group dedicated to this subject within the Heart of the City initiative. Having discussed the subject with Gordon Brown, at that time the Chancellor of the Exchequer, Lord George invited Andrew Buxton, who had an interest in Islamic finance, to convene the group. Buxton was Chairman of the Heart of the City campaign and a former Chairman of Barclays.

The working group included representatives from the Treasury and the FSA (Financial Services Authority, the industry regulator), as well as the Council of Mortgage Lenders and a number of banks, including Ahli United Bank, HSBC and Barclays, plus lawyers and representatives from the Muslim community. There was a fairly long list of obstacles, says Lord George. Particularly thorny was the issue of stamp duty, with the need to ensure that Shari’ah mortgages did not incur this twice because of the nature of the transaction, involving initial ownership by a financier. ‘We couldn’t unhinge the stamp duty process as a whole,’ but a workable solution was ultimately hammered out with the Treasury.

There was also a need to ensure that disadvantages were removed within the ‘Right to Buy’ or ‘Right to Rent’ public home ownership schemes, so that the role of a financier did not mean that Muslim buyers were excluded from the benefits offered by such schemes. There were many ambiguities and a large part of the effort was tracking down and resolving these. ‘No one had really done this before,’ says Lord George.

There was a lot of enthusiasm which was extremely encouraging, says Lord George. It was felt that this was the right thing to do, with the UK having a tradition of being receptive and supportive of different religions and societies, and with the Shari’ah mortgage project another demonstration of this. The effort was helped by the fact that it was clear that Shari’ah banking as a whole was growing quickly. It was also felt that with mortgages, as with other Islamic products, demand might not come purely from the Muslim community.

The first working group was hosted by the Bank of England, and Lord George did not miss a single meeting... The efforts were deeply appreciated within the Muslim community... The work would allow UK Muslims to be both more Muslim and yet at the same time more British in their country.

While Lord George is quick and fulsome in his praise of other individuals involved in the work, there is no doubt that his own role was vital. Iqbal Khan points out the importance of Lord George’s patronage and involvement. The first working group was hosted by the Bank of England, and Lord George did not miss a single meeting, he recalls. The efforts were deeply appreciated within the Muslim community, he points out, with the project attracting a lot of focus. He recalls the Imam of his own local mosque making a telling point: the work would allow UK Muslims to be both more Muslim and yet at the same time more British in their country. It was a similar theme in mosques around the country, with prayers for the success of the scheme, he says.

It is also worth pointing out that the efforts were not solely of importance to the UK. Indeed, far from it. Khan cites the press coverage that the initiative generated across the Muslim world. Many countries were lagging behind and did not have the regulatory framework themselves. In fact, the UK work led to changes elsewhere, influencing regulations in Malaysia and Brunei, among other countries.

Bank of England
The Bank of England traditionally has very good relationships with other central banks, says Lord George. This is partly historical and partly through proactive means. For instance, Bank of England staff are encouraged to spend time outside the UK (Lord George himself spent a formative year in Moscow in the mid-1960s, where he saw at first hand what he describes as the Soviet ‘disconnect’ between the banks and industry). The Bank of England also introduced an annual conference for Commonwealth central banks, with this subsequently having been broadened to developing countries as a whole. And it set up the Institute of Central Banking Studies which, says Lord George, has played a very important role in Islamic finance as well.

Although Ahli United Bank, formerly United Bank of Kuwait, has been offering Islamic mortgages in the UK since the late 1990s, it was the Finance Act 2003 that really opened the door to Shari’ah-compliant mortgages providing impetus in this niche of financial markets by levelling the playing field for Islamic mortgages regarding stamp duty. As a result, other players like HSBC Amanah, Alburaq, Islamic Bank of Britain and Lloyds TSB entered the arena providing competition and increasing awareness to customers on a wider level. The work did not stop with mortgages, of course, with the ongoing evolution of areas such as Shari’ah-compliant pensions, sukuk trading and private equity, but the pioneering work in mortgages laid the foundations for further progress at home and abroad. In the UK itself, Shari’ah banking as a whole has been helped by the favourable environment, as reflected in Gordon Brown’s vision of Britain as a centre for Islamic finance.

In terms of the bigger picture, it is unlikely that the Bank of England would have taken such a lead in the past. When Lord George first joined the institution, it had a purely administrative role, implementing direct control of the economy on behalf of the government. It is easy to forget, even for those who were around at the time, that the UK’s economy was extremely cyclical, lurching from ‘boom to bust’ with interest rates that Lord George calls ‘extraordinary’ and with a trade-off between growth and inflation. Inflation was rampant and interest rates could move two per cent on one day.

The efforts were not solely of importance to the UK... In fact, the UK work led to changes elsewhere, influencing regulations in Malaysia and Brunei, among other countries.

The cycles were more pronounced than in other developed economies and, over time, the troughs were becoming deeper and the peaks higher. ‘We were looking over a precipice; there was a gradual realisation that this was not the way forward.’

The need for change opened the way to a clear shift in the role and position of the UK’s central bank, with a loosening of the political constraints that it was working under. Independence for the Bank was something that happened much faster than Lord George expected. He had discussed it with Gordon Brown and there was agreement on the matter but he expected it to take two or three years; in fact, it was set in motion four days after the new Labour government came into office. Transparency and public accountability were notable parts of the change, with Lord George pushing through the publishing of the minutes of the Bank’s meetings.

Fifteen years ago, the UK was one of the worst performers of the industrial countries; today it is one of the best. There was no one particular factor, rather a combination. The transformation was not overnight but was still relatively swift in economic terms. Now, Lord George pronounces himself ‘very optimistic’ about the UK economy. Although clearly keeping busy and ‘interested in all sorts of things’, he made a definite decision to ‘pull right back’ from the Bank of England when he retired, confident that the Bank was in excellent hands under his successor, Mervyn King (‘a first rate economist’). He laughingly says he misses the ‘molly-coddling’ of his staff at the Bank but other than that he is obviously enjoying life and still keeping a keen watching brief on the ongoing evolution of Shari’ah finance.

Source: New Horison - Islamic Perspective on Islamic Banking and Insurance