Al Rayan Bank CEO Sultan Choudhury explains how the first Western sharia-compliant bank defied early setbacks and the global financial crisis to write its own success story.
When the Islamic Bank of Britain opened its doors in 2004 it became the first sharia-compliant bank to originate in the Western world. Not only did this highlight the global growth in Islamic banking, it also underscored the UK’s progressive regulatory stance towards the development of Islamic finance. Now known as Al Rayan Bank, following an acquisition by Qatar’s Masraf Al Rayan in 2014, it remains the UK’s only fully sharia-compliant retail bank.
Nevertheless, as a pioneer of Islamic finance in the UK, Al Rayan’s early years were not free from developmental challenges. “Structurally, our balance sheet was lopsided because it was heavy on deposits due to our initial focus on savings accounts,” says chief executive officer Sultan Choudhury. “In addition, awareness of Islamic finance, even among the UK’s Muslim community, was low. This meant that we had to work hard to build relationships and educate people to build up our profile.”
Overcoming hurdles
These early problems were compounded by the global financial crisis, when the bank’s yields on its large holdings of treasury placements were hit hard. More recently, Al Rayan’s fortunes have improved and in 2014 the lender recorded a profit for the first time since its inception. This turnaround is in part due to the support of Qatar’s Masraf Al Rayan, the country's largest sharia-compliant bank by market capitalisation, whose acquisition of the Islamic Bank of Britain was finalised in early 2014.
“This deal is indicative of Masraf Al Rayan’s global ambitions. It is not just interested in Qatar,” says Mr Choudhury. “Europe is certainly seen as a key market for further growth and the UK is a first step in this process. It also has ambitions for Asia and Africa. So it wants to build a global brand and that’s why [the Islamic Bank of Britain’s] rebrand to Al Rayan Bank occurred.”
Brighter prospects
The acquisition has boosted Al Rayan’s growth prospects: it posted £1.2m ($1.87m) in profit after tax in 2014, up from a loss of £5.5m in the previous year. Moreover, the bank has been able to increase its customer financing by 86% while investing heavily in mobile banking options, staff and internal IT infrastructure, as well as a flagship branch in Knightsbridge, London. These developments followed a capital injection by Masraf Al Rayan of £75m in 2014, increasing Al Rayan Bank’s capital position to £100m.
Moreover, support from the Qatari parent has enabled Al Rayan to optimise its investment in cloud technology platform Salesforce. Here, the bank has adopted a unique approach in terms of integrating the platform into its daily operations. “Its use impacts almost all of Al Rayan’s operations, from cashiering to account opening to mortgage processing, as well as staff communication, among others,” says Mr Choudhury. “This is quite revolutionary for a small bank because it allows us to leapfrog more established lenders with legacy systems. Under this approach, we are converting fixed costs to variable costs because cloud technology is utilised on a per user basis.”
Hospitable environment
The bank’s growth story is also a good reflection of the supportive business and regulatory environment fostered by the UK government. “The UK to my mind is possibly one of the best jurisdictions in the world – including the Islamic world – in terms of sharia-compliant finance,” says Mr Choudhury. “The environment is good because the regulator and the government are very supportive of positioning the UK as a place to do business.”
Encouragingly, this has included not only the investment side of the Islamic finance space but also retail and consumer finance. “I think what really stands out in terms of the UK approach is the commitment to providing a regulatory level playing field for sharia-compliant finance to benefit its citizens, including sharia-compliant student finance and removal of double stamp duty on Islamically financed real estate transactions, for instance,” says Mr Choudhury. “This helps to build community cohesion and financial inclusiveness. A number of other European jurisdictions support Islamic finance at the wholesale level but they aren't doing it for their people.”
