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A business should exist only if it can make an acceptable return on the capital its shareholders have invested in it. Against that simple test, some of the UK's Islamic banks have a lamentable record.

The UK's largest Islamic investment bank is Bank of London and the Middle East plc. A few years ago, I looked at its results in my October 2022 column for the magazine "Islamic Finance News." Accordingly for my September 2024 column I did an update.

You can read it below.

How is the UK’s largest Islamic investment bank doing?

Bank of London and The Middle East plc (“BLME”) has been the largest standalone Islamic investment bank in the UK since shortly after it was established in the mid-2000’s. It has had a disappointing financial history, with its annual results being a mix of small profits interspersed with large losses.

It has been almost two years since I last looked at BLME’s business in my 5 October 2022 column, when the latest available results were those for the year ended 31 December 2021.

The simplest approach is to update the table I included in my previous column.

For simplicity, I have computed the return on equity by using the equity figure at the end of the year, rather than the more precise approach of averaging the opening and closing equity. That would not materially change the message.

After nearly 20 years of operations, the shareholders have yet to see any net return on their investment, having lost a cumulative £ 17.1 million.

I read many companies’ financial statements. With rare exceptions, no matter how poor the performance, management tend to put a positive “spin” on the results. Sadly, BLME appears to follow the same practice.

For example, in the 2022 accounts, where it reports a £ 6.8 million loss, the Directors Report does of course state the loss, but then simply says “The results for the year are discussed further in the Bank’s strategic report.”

The 2022 Strategic Report is over seven pages long. It does of course include the £ 6.8 million loss figure, but contains no explanation of why it has arisen. The only comments on the results that I could find were as follows:

“STRATEGY AND OBJECTIVES section

We are proud of our efforts in delivering steady operating performance.”

“FINANCIAL RESULTS section

The underlying results of the Bank remain resilient and in line with the strategic set up plan.”

As a reader of the accounts, I would expect to see a serious attempt to explain why the bank lost money in 2021 and 2022, and in 2023 why the results turned round, even though with a return on equity of only 2.3% they are still not acceptable in my opinion.

While it is not easy reading the accounts as an outsider, in my view the main reason for BLME’s lack of profitability is that it has insufficient income generating assets in relation to its equity.

Using the 31 December 2023 balance sheet, Financing Arrangements / Equity = £ 1,010 million / £ 228.2 million = 4.42.

This ratio of 4.42 feels low to me. As a comparison, I looked at the 31 December 2023 balance sheet of Bank Boubyan of Kuwait, BLME’s ultimate parent company, which has a much higher 2023 return on equity. Doing a similar calculation:

(Islamic financing to customers + Investment in sukuk) / Equity attributable to equity holders of the Bank = (KWD 6,321 million + KWD 886 million) / KWD 855 million = 8.4. This ratio is nearly twice as high as BLME’s.

Mohammed Amin is an Islamic finance consultant and former tax partner at PwC in the UK.