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Al Rayan Bank plc becoming internet-only is sensible

Physical branches are an expensive luxury in retail banking. Small retail banks should avoid them.

Posted 18 December 2022

Questions from readers of my website often inspire one of my monthly columns in the magazine "Islamic Finance News".

My September column was inspired by a journalist asking me what I thought about Al Rayan Bank closing its last branch serving regular (that is not high-net-worth) retail customers. You can read it below.

Retail Islamic banks need to become internet-only.

I have written about the UK’s first (and so far only) retail Islamic bank, originally called Islamic Bank of Britain (“IBB”) and now called Al Rayan Bank on a number of occasions.

Most recently, in the 2 June 2021 issue, "A snapshot of the UK Islamic banking scene in 2021", I looked at the calendar 2020 results. In that year it made a profit of £ 3.8 million (US$ 5.39 million). As I wrote: “The return on equity of 2.5% is nothing to be proud of. However, 2020 was overshadowed by the coronavirus pandemic, so staying profitable is an achievement.”

I have been looking at the bank again, in particular because a journalist asked me for my opinion on the closure of its last branch serving regular retail customers. (It has retained a branch in the upmarket area of Knightsbridge, London, to serve high net worth individuals and GCC customers.)

My reaction can be summarised as: “About time!”

I recall several conversations only a few years after the establishment of IBB with the then CEO.

The bank was losing money heavily (see my historical summary of the results in the 6 February 2019 issue "A financial history of Islamic Bank of Britain plc, now called Al Rayan Bank plc"). I explained that branches were just an expensive way to incur costs, and that being internet-only would be a much more cost-effective approach.

While internet usage was not as widespread then as it is today, there were already internet-only banks such as Smile (a separate brand of The Co-operative Bank) and telephone-only banks such as First Direct (a separate brand of HSBC) as well as ING Direct which was a dedicated internet-only deposit gathering bank.

IBB’s view was that retail Muslim customers wanted physical branches. However, over the last few years Al Rayan has recognised that branches are both expensive and unnecessary, and step-by-step they have closed their retail branches.

Obviously, some customers will be lost as there are always some individuals who cannot cope with internet banking. (While older people are often classified that way, as someone who has been an intensive internet user since the mid-1990’s and who is aged 71, I have no sympathy with anyone who claims they cannot use the internet due to their age!)

I was also asked why Al Rayan’s assets were only £ 2.26 billion (as reported in the 31 December 2021 balance sheet) when it states on its website that it has 90,000 customers.

My reaction was to do a comparison.

Al Rayan’s £ 2.26 bn of assets spread over 90,000 customers mean that assets per customer average about £ 25,000. Nationwide Building Society is much larger but has a similar retail banking focus. Its 2022 accounts report that Nationwide has 16.3 million members, and total assets of £ 272 bn, which is an average per member of £ 16,700. This makes the Al Rayan numbers look much more reasonable.

Looking at the wider picture, in 2021 Al Rayan made a profit of £ 9.6 million, which is more than double the 2020 figure, and which represents a return on equity of 6.12%. Given that 2021 was still a very low interest rate environment (which always makes it hard for retail banks to make money) I consider 6.12% a very creditable rate of return on equity.

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.

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


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