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Closing its physical branches was the right decision for this retail Islamic bank
Posted 19 April 2025
In my June 2024 column for the magazine "Islamic Finance News" I took another look at the results of the UK's only retail Islamic bank. I concluded that they demonstrated that closing its physical branches was the correct strategic decision.
You can read it below.
Al Rayan Bank plc, previously called Islamic Bank of Britain, is the only retail Islamic bank in the UK. My 6 February 2019 column “The UK’s first Islamic bank — a financial history” showed that it made significant losses until it was taken over by the Qatari bank Masraf Al Rayan.
I wrote about it again in my 7 September 2022 column “Retail Islamic banks need to become internet-only.” A journalist had written to me criticising Al Rayan for closing its retail branches. Conversely, think that for retail banks branches are expensive and largely unnecessary. I finished:
“With the closure of its last branch serving regular retail customers, in my view Al Rayan finally has the right strategy for a retail Islamic bank in the UK. I look forward to seeing the future results.”
We now have those future results, and I have set out the last six years.
Al Rayan Bank plc |
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Key statistics for year ended 31 December |
2018 | 2019 | 2020 | 2021 | 2022 | 2023 |
Total income, £'m |
38.6 | 42.6 | 39.1 | 44.4 | 55.8 | |
Total operating expenses £'m |
32.5 | 36.0 | 34.9 | 34.8 | 35.0 | |
Cost to income ratio |
84% | 85% | 89% | 78% | 63% | 53% |
Profit after tax £'m |
6.4 | 6.1 | 3.8 | 9.0 | 16.5 | 24.2 |
Total equity £'m |
135.0 | 145.9 | 150.1 | 157.3 | 167.3 | 191.5 |
Return on equity |
4.7% | 4.2% | 2.5% | 5.7% | 9.9% | 12.6% |
Employee numbers: |
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Front office |
112 | 108 | 82 | 52 | ||
Back office |
134 | 227 | 204 | 175 | ||
Total |
246 | 335 | 286 | 227 | 210 | 200+ |
12 month retail prices index change |
2.7% | 2.2% | 1.2% | 7.5% | 13.4% | 5.2% |
Unfortunately, the 2023 figures are incomplete. Full accounts have not yet been filed with the UK Companies House registry; instead I have relied on Al Rayan’s 23 April 2024 press release announcing the 2023 results, and had to estimate its tax rate to convert pre-tax profits to post tax profits, and estimate its equity.
Until November 2021, UK interest rates were very low, ranging from 0.75% to 0.1%. It is very hard for banks to make profits in a low interest rate environment, so Al Rayan’s 2018-2021 results were unsurprising.
Interest rates rose throughout 2022, continuing to rise until August 2023. Accordingly, it is no surprise that Al Rayan’s profits increased. When market interest rates rise, banks typically raise interest (or its Islamic banking equivalent) paid on deposits more slowly than interest (or its Islamic banking equivalent) charged on finance provided to customers.
Total operating expenses remained reasonably flat at about £35 million. I expected them to fall due to branch closures, after a delay. (Initially employee severance payments and lease termination costs increase your total costs when you close branches.)
However, in the UK’s inflationary environment, if the employee and branch numbers had remained unchanged, the operating expenses would have risen significantly. For example, if costs had risen in line with inflation, the 2018 figure of £32.5 million would have become £42 million for 2022.
Accordingly, Al Rayan can be commended for successful cost reduction by getting rid of their retail branches.
Mohammed Amin is an Islamic finance consultant and former tax partner at PwC in the UK.
