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In my January 2019 column in the magazine "Islamic Finance News", I summarised the accounts of the UK's largest Islamic investment bank, Bank of London and the Middle East plc. See my page "Small profits mixed with big losses - the record of the UK's largest Islamic investment bank."

In my February 2019 column, I subjected Islamic Bank of Britain plc, now called Al Rayan Bank plc, to the same treatment. The business models of the two banks are entirely different, as IBB / Al Rayan is a retail bank, albeit Islamic, just like the conventional retail banks that most readers will use for their day to day banking requirements.

You can read it below.

The article omitted to say explicitly that the capital increase in 2014 followed the takeover of Islamic Bank of Britain by the Qatari bank Masraf Al Rayan, after which Islamic Bank of Britain was renamed Al Rayan Bank.

The UK’s first Islamic bank – a financial history

Islamic Bank of Britain plc (now called Al Rayan Bank plc) was set up in mid-2004. It was the UK’s first Islamic bank, and until recently its only retail Islamic bank.

As with Bank of London and the Middle East plc last month, I have downloaded the accounts and summarised them in the table. Until 2014, the results were steadily horrible. Then they changed. Like football, this bank’s history is a game of two halves!

From inception, the bank steadily lost money, relying upon additional injections of shareholders’ funds to avoid having to shut down. Why were the results so awful?

Very simply, the bank was too small. Its 2005 capital was only £40.5 million. Its strategy involved physical branches, which entailed relatively high fixed costs. Those could only be justified if the branches facilitated a large volume of income earning customer financings.

Unfortunately, the bank’s small capital severely constrained the amount of customer financing it was permitted to do. The table shows that deposits from customers (“customer liabilities”) vastly exceeded customer financing assets. The excess deposits were invested in the Islamic interbank money market but will have earned relatively low rates of return.

Accordingly, the bank was effectively locked into losing money steadily year after year. If it had not been taken over, it would eventually have had to shut down once its shareholders tired of putting in additional share capital to cover its operating losses.

Post takeover, it is a different story. 2014 shows a very large increase in shareholders’ funds. This additional share capital allowed a dramatic increase in customer financing assets while the branch network was essentially unchanged. Accordingly, the bank’s customer financings were able to grow, but without any corresponding increase in the bank’s operating costs. Hence it began making a profit.

Subsequently, the additional capital has allowed continued growth in customer financing assets. Accordingly, the annual profit has grown to a more respectable figure.

Although the return on equity remains well under 10%, that is not too bad in the challenging environment of UK retail banking. For example, the conventional industry’s UK focused retail banking giant, Lloyds Banking Group PLC, achieved a 2017 return on equity of only 6.5%.

There remains significant scope for growth in customer financing assets. In 2018, Al Rayan Bank plc made the first ever UK Islamic bank sukuk issue (see my article in Islamic Finance News for April 2018) specifically to enable it to continue expanding its home purchase plan assets.