Forty years on from the tentative beginnings of Islamic banking in the UK, the country’s fledgling sharia-compliant banks have yet to make significant inroads with Muslim or non-Muslim customers. The Islamic banks that remain in the market are seeking to bolster their credentials by playing up their ethical finance credentials, while competing on price with their conventional counterparts in specific market segments.
The Banker’s 2022 Top Islamic Financial Institutions ranking confirms that, despite the presence of Islamic banks in all regions of the world, sharia-compliant finance remains largely a Middle Eastern and Asian phenomenon, with the two regions accounting for 97% of total assets worldwide. Europe, the next largest market, accounts for 1.8% of the total asset base, largely thanks to activity in Turkey, home to the world’s eighth largest Muslim population.
Unmet aspirations
While Al Baraka Bank established a branch in the UK in the 1980s, Islamic banking began to bloom in the UK in the 2000s, with the government encouraging growth in the sector by adapting financial services regulations and tax treatments to make them more compliant with sharia. Islamic Bank of Britain (later re-branded as Al Rayan following its acquisition by Qatar’s Masraf Al Rayan) became the UK’s first fully licensed Islamic bank in 2004, with other standalone banks and Islamic windows opening in the following years.
Fast forward to 2022 and the sector has failed to live up to its early aspirations; Islamic windows at traditional banks have been shuttered, with HSBC’s Amanah window closing in 2012. More recently, Abu Dhabi Islamic Bank announced the closure of its sole UK branch in 2020.
Efforts to position the UK as a major centre for sukuk issuance have also foundered in recent years. In 2014, the country became the first outside the Islamic world to issue a sovereign sukuk, worth £200m. While that issuance was 10 times oversubscribed, a follow-up £650m sukuk, issued in 2021, closed with an oversubscription of just 1.25 times.
While such issuances were designed to kickstart Islamic capital raising in the country, the UK has seen just one non-sovereign issuance – Al Rayan’s £250m residential mortgage-backed sukuk of 2018 – as at the time of writing.
“This leads us to believe that private sector issuers in the UK see little added value for sukuks in their funding profile,” said S&P Ratings in a September update.
Sharia-compliant assets for Islamic banks in the UK stood at $7.8bn at end-2021, growing by 3% during the year. Al Rayan remains the country’s largest Islamic bank, accounting for around 40% of the UK’s total sharia-compliant asset base. Third-placed Gatehouse Bank recorded the country’s best growth for the year, its asset base increasing by 26.1% to $1.4bn.
On the performance side, fourth-placed Qatar Islamic Bank UK comes out on top among its peers, thanks to strong scores for profitability, operational efficiency, asset quality and return on risk.
Even in its second decade, the UK’s Islamic finance sector remains nascent, accounting for less than 0.1% of the country’s total banking assets, with retail banking services largely failing to catch on among the country’s approximately 3.3 million-strong Muslim population.
“At its highest point, Al Rayan only managed to attract 60,000 customers, which is not even 1% of the Muslim community in Britain,” says Alija Avdukic, a senior lecturer in Islamic economics and finance at Al-Maktoum College in Dundee, Scotland.
“The substance of Islamic finance has to be delivered in order to really engage customers. Still, at this stage, much of what's on offer is seen by the community as a box-ticking exercise that doesn’t deliver a true Islamic banking experience,” he adds.
Dr Avdukic noted that on the home financing side, many UK Muslims preferred to finance house purchases via family and community networks rather than via Islamic or conventional banks.
Finding a lucrative niche
Al Rayan announced a strategic pivot earlier this year to focus on commercial real estate financing, premium banking services and the fixed-deposit market.
Giles Cunningham, Al Rayan’s CEO, told The Banker in March that its retail customer base stood at just 37,000 in early 2022 after 18 years of operations.
In the UK or any other country where clients are less sensitive to the sharia-compliant aspects, Islamic products need to demonstrate real economic value
“It does beg the question of whether the market is really there for pure Islamic banks in the retail banking space. Our conclusion is that the growth is elsewhere,” he said. The bank shuttered its last physical branch in August.
Other Islamic banks have joined Al Rayan in the fixed-deposit space, appealing to UK savers with competitive rates, in recognition of the need to compete on price with their conventional counterparts.
“In the UK, or any other country where clients are less sensitive to the sharia-compliant aspects, Islamic products need to demonstrate real economic value,” says Mohamed Damak, a senior director at S&P Ratings in Dubai. “That’s why the industry has not developed strongly so far in markets like the UK and US, or even in sub-Saharan Africa.”
Leaning ethical and digital
In addition to competing on price where possible, UK Islamic banks have sought to play upon the ethical aspects of sharia-compliant finance in a bid to attract ethically minded customers of all backgrounds.
“There is a natural alignment between sharia principles and ethical and sustainable banking frameworks,” says Charles Haresnape, CEO of Gatehouse. “Our banking products are available to customers of all faiths and none, as we aim to help people align their financial goals with their ethical and sustainable values.”
Mr Haresnape says that customers for its saving products have grown from 19,500 to more than 25,000. Many non-Muslim customers have actively chosen sharia-compliant products and services because they view them as ethical, fair, and socially responsible.
“However, some people are still unaware that they are eligible for sharia-compliant finance options, so there is a need for continued education on these ethical products,” he says.
In addition to tapping into customers’ ethical concerns, Islamic banks are looking to digital technology to drive further take up. Kuwait’s Boubyan Bank and Bank of London and the Middle East – both owned by the National Bank of Kuwait – launched Nomo, a sharia-compliant digital banking offering, in July 2021, targeted at nationals from the Gulf Co-operation Council (GCC) resident in the UK.
Taking a wider approach is Algbra, a sharia-compliant digital bank that is positioning itself primarily as “sustainable and values-focused”, whose backers include former UK chancellor Phillip Hammond and Alastair Lukies, chairman of the UK Fintech Alliance. The company, which received an electronic money institution licence from the Financial Conduct Authority in June, is currently in a pre-launch phase, with around 3000 users transacting on its platform.
Algbra is hoping to offer a product that offers a rich feature set that appeals to both ethically minded consumers and the wider Muslim community.
“What we’ve done as a company is to develop a universal values and ethics proposition that incorporates sharia-compliance and has been approved by a sharia board,” says Nizam Uddin, Algbra’s chief strategy officer.
“From a consumer perspective you have to ask whether there’s been a really high-quality banking product in the UK that also happens to be sharia-compliant. I don’t know if the answer to that is yes, so that is what we’re trying to provide.”
