Mandelbrot set image very small MohammedAmin.com
Serious writing for
serious readers
Follow @Mohammed_Amin
Join my
email list

Search this site

Custom Search
Tap here for MENU

A late 2012 snapshot of the UK Islamic finance industry

Summary

Written 19 November 2012, published 20 April 2013

Each year the magazine Islamic Finance News publishes a guide to of the Islamic finance industry globally. I was asked to supply a UK page in late 2012, and submitted it on 19 November 2012. I was dilatory in following up its publication, but have now seen that the global publication "Islamic Finance News Guide 2013" was published in February 2013.

Accordingly I have reproduced my below the UK page that I contributed. The full guide is only available to subscribers.

UK: A tough year for Islamic finance

The UK has led non-Muslim majority countries in the establishment of Islamic financial institutions and changes to tax law and regulatory policies to facilitate Islamic finance.

Since the Global Financial crisis struck in 2008, with a recession in the UK and falling real estate values in the Gulf, the UK Islamic finance industry has struggled. The UK’s first standalone takaful operator closed due to having insufficient capital, and no new Islamic bank has been opened since June 2008.

2012 - A Review

For the UK as a whole, and for the UK Islamic finance industry, 2012 has been another tough year. From late 2011, the UK economy fell back into recession before emerging in the third quarter. Despite the boost to morale from the Queen’s Diamond Jubilee and a very successful Olympic Games, the “feel good” factor has been scarce in the UK.

It is worthwhile looking at the UK’s standalone Islamic banks in detail. As some of them do not publish half year results, I have summarised their results for the year ended 31 December 2011 below. This gives a complete and comparable set of figures.

Name

Shareholders’
equity
£’m

Total
assets
£’m

Profit
(loss)
before tax
£’m

Bank of London and the Middle East (BLME)

239

807

(9)

European Islamic Investment Bank (EIIB)

129

159

(11)

Gatehouse Bank

115

164

(4)

Islamic Bank of Britain (IBB)

17

217

(9)

QIB (UK)

17

131

0

The banks are ranked by their shareholders’ equity. In the writer’s view, this is the single best measure for assessing the size of a bank. The accounts show that 2011 was a difficult year for all the banks, with QIB making a small profit (£264,000 before tax) and the others all making significant losses. The 2012 figures will become available mid-2013.

From a business perspective, it is essential to look at the retail market and the wholesale / corporate market separately.

The retail market

Islamic Bank of Britain is focused on the retail market. The results since it opened in 2004 have shown that the retail Islamic finance market in the UK is very small, and hard to serve profitably. Indeed IBB has made losses in each year of operation.

The writer considers that the reason why retail Islamic finance has not taken off in the UK is that the addressable market is very small. There are only about 2.4 million Muslims in the UK, many of who are too young to need banking services, and many others are too poor to be profitable customers for Islamic banks. The remainder divide into three groups:

  1. Those Muslims who do not have a fundamental objection to conventional finance, even if they may object to some conventional financial practices on a case-by-case basis.
  2. Those Muslims who do regard conventional banking as impermissible but consider Islamic banking as practised today to be acceptable from an Islamic perspective.
  3. Those Muslims who consider that both conventional banking and Islamic banking as practised today are impermissible.

Only group (2) are the addressable market for Islamic finance, since retail Islamic finance is not cost competitive with conventional finance due to lacking economies of scale and having higher transaction costs due to contractual complexity. While the writer has no statistics, his view is that this addressable market is tiny.

The gloom about the retail market was deepened in 2012 when HSBC’s retail Islamic finance division HSBC Amanah closed in the UK as part of a global retrenchment to core markets.

The wholesale market

The UK remains an attractive location for wholesale / corporate / investment banking, asset management and wealth management aimed at high net worth individuals. The strategies of the four non-retail Islamic banks focus on these areas, with the specific strategies varying amongst the banks.

2013 - A Preview

There are hopes that during 2013 the UK economy will complete its emergence from recession, although much depends upon events elsewhere. In particular how the USA deals with the “fiscal cliff” due to impact upon US taxation and spending on 1 January 2013, and how the Eurozone deals with its continuing sovereign debt crises. If both go well, the UK economy should improve significantly.

It is possible that 2013 may see new Islamic financial services providers being established, particularly to serve as a bridge between investors in Muslim majority countries and the UK. At the same time, the existing UK Islamic banks will continue with their individual strategies while in certain cases working through historic non-performing or under-performing financing positions.

 

The Disqus comments facility below allows you to comment on this page. Please respect others when commenting.
You can login using any of your Twitter, Facebook, Google+ or Disqus identities.
Even if you are not registered on any of these, you can still post a comment.
comments powered by Disqus

 

Custom Search

Follow @Mohammed_Amin

Tap for top of page