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The UK Islamic banking scene

1 September 2010

In the table below, I have summarised some key data regarding the five Islamic banks in the UK as at 31 December 2009.

UK Islamic Banks
Selected information as at 31 December 2009 in £'million
Name Abbrev Date licensed Shareholders' Funds Profit and loss account as stated on balance sheet Parent Company
Islamic Bank of Britain plc IBB August 2004 16.8 (43.5) Qatar International Islamic Bank
European Islamic Investment Bank plc EIIB March 2006 140.4 (34.7) None
Bank of London and the Middle East plc BLME July 2007 243.5 (10.7) None
QIB (UK) plc QIB January 2008 18.2 (6.8) Qatar Islamic Bank
Gatehouse Bank plc GB April 2008 25.1 (24.8) The Securities House (Kuwait)
           
IBB issued £20m of shares in August 2010  to Qatar International Islamic Bank not reflected in shareholders funds above.
EIIB profit and loss account has been restated to exclude effect of capital reduction in December 2009.
Qatar International Islamic Bank and Qatar Islamic Bank are different companies.

 

Retail banking

Only one of the banks listed, IBB, is a retail bank. The accounts show that since it commenced business, cumulative losses have amounted to £43.5 million, reducing the shareholders funds to £16.8 million. On 27 July 2010 IBB issued a press release to announce that it was raising £20 million of additional capital by issuing shares to Qatar International Islamic Bank at 1p per share. The press release stated that if the share issue were not to proceed, IBB would be unable to continue operating as a going concern. Looking back at the 2004 accounts shows that £40 million was raised by issuing 160 million shares at 25p each; this illustrates the level of loss suffered by the original shareholders in the intervening period.

No other standalone Islamic bank has sought to enter the retail market, although both HSBC and LloydsTSB have a retail offering delivered through their existing branch structures. HSBC uses the "HSBC Amanah" brand in the UK, to be consistent with its global branding. Conversely, LloydsTSB does not separately brand its retail Islamic business. Instead, its Islamic current account can be found from the main LloydsTSB website by clicking on current accounts and then clicking on "other accounts." It appears logical for LloydsTSB to avoid the costs of having a separate sub brand for its Islamic business as the UK business would be small and, unlike HSBC Amanah which has a major presence overseas, LloydsTSB does not have any material footprint in Muslim majority countries.

In my opinion the reason why retail Islamic finance has not taken off in the UK in the manner originally hoped 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 religious views on finance of those who remain fall into three categories.

(1) Usage of conventional finance

Many Muslims do not have a fundamental objection to conventional finance, although they may object to some conventional financial practices on a case-by-case basis. Accordingly, they are willing to bank with conventional banks.

For example in many countries such as Malaysia and Bahrain where Islamic banking is long established, about 70% of all banking is still conventional. While some of this will be banking by non-Muslims, especially in Malaysia, much of it will be banking by Muslims who do not share the view that all interest is prohibited in all circumstances.

(2) Usage of Islamic banking as practised today

Some Muslims do regard conventional banking as impermissible but consider Islamic banking as practised today to be acceptable from an Islamic perspective.

(3) Rejection of current Islamic banking practices

Some Muslims consider that both conventional banking and Islamic banking as practised today are impermissible.

What this religious segmentation means is that only Muslims in category (2) are part of the addressable market for Islamic finance, since retail Islamic finance is not cost competitive with conventional finance due to lacking economies of scale and higher transaction costs due to contractual complexity. While I have no statistics, my view is that in the UK this addressable market is tiny.

Overall, I would not expect to see any dramatic growth in the UK retail Islamic banking market, and consider that the most effective way of serving the market is either as a part of a larger business as with LloydsTSB and HSBC Amanah. They achieve economies of scale as they are able to use their existing branch infrastructure to distribute Islamic products as well as conventional products. The other cost effective approach is to set up as an internet based business.

Investment banking

All investment banks, whether conventional or Islamic, have a business model which consists of some or all of the following:

All four of the other Islamic banks in the UK are investment banks. While established in London, their field of operations is not limited to the UK; instead they aim to operate internationally. London simply provides a convenient location in which to base their teams, recruit people, connect with professional advisers and remain in touch with the market. London in fact is an almost ideal investment banking location, taking account of the availability of banking skills, communications and geography.

The four investment banks divide naturally into two groups.

EIIB and BLME do not have a single controlling shareholder. They also have a relatively large amount of shareholders’ funds. This gives them much greater capacity (compared with the other two) to use their balance sheets when providing finance or engaging in proprietary trading and investment.

QIB (UK) plc was until recently called European Finance House Ltd but from inception has been a subsidiary of Qatar Islamic Bank. Both QIB and GB are subsidiaries and have a relatively small amount of shareholders funds. Accordingly, their business model will major on fee-based activities with a relatively small amount of proprietary trading. Where customer finance is provided, virtually all the finance provided will need to be syndicated as the bank’s own balance sheet is relatively small.

The table shows that all four investment banks have made cumulative losses. The size of the losses made varies compared with the shareholders funds but in this short article it is not feasible to explore the numbers further.

Given the very difficult global financial climate over the last two or three years, and the significant credit problems experienced in the Middle East with the local fall in real estate prices, it is not surprising that the investment banks have experienced losses. However, unlike the retail market, I see significant scope for the Islamic investment banking industry in London to develop further. The reason is that Islamic banking and finance globally continues to grow strongly, which creates a continuing demand for investment banking skills. London is an outstanding location for supplying investment banking services and as the economy improves I would expect more Islamic investment banks to be established here.

Concluding comments

As I meet the management of all of the UK's Islamic banks fairly often, I have worked hard to ensure that this article is based entirely on public domain information.

This article was originally published in the magazine "Islamic Finance News" on page 14 of the issue of 1 September 2010.

 

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