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country report
UK
UK: A tough year for Islamic finance
By Mohammed Amin
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 ‘feelgood’
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 As some of them do not publish half year results, I have
summarized their results for the year ended the 31 st December
2011 below. This gives a complete and comparable set of figures.
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 (GBP264,000
(US$423,251) 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 (IBB) 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 US deals with the ‘fiscal cliff’ due to
impact upon US taxation and spending on the 1 st 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
consulting www.IslamicFinanceConsulting.com
www.IslamicFinanceEvents.com
positions.
www.IslamicFinanceNews.com
www.IslamicFinanceTraining.com
www.MIFforum.com
www.MIFmonthly.com
www.MIFtraining.com
www.REDmoneyBooks.com
Mohammed Amin is an Islamic finance consultant and was previously
UK Head of Islamic Finance at PricewaterhouseCoopers.
He can be contacted mohammed.amin@btinternet.com.
Name
Shareholders’ equity GBPm
(US$m)
Total assets GBPm
(US$)
Profit (loss) before tax GBPm
(US$m)
Bank of London and the
Middle East (BLME)
European Islamic
Investment Bank (EIIB)
239 (383) 807 (1,293) (9) (14)
129 (206) 159 (254) (11) (17)
Gatehouse Bank 115 (184) 164 (262) (4) (6)
Islamic Bank of Britain (IBB) 17 (27) 217 (347) (9) (14)
QIB (UK) 17 (27) 131 (209) 0
February 2013 53