In my June column for the magazine Islamic Finance News, I revisited a subject that I had not written about for six years.
That is a comparative look at the Islamic banks in the UK. You can read it below.
The overall message is that the number of Islamic banks has shrunk by some of them exiting. Those which remain have more differentiated strategies, and divide naturally into a "Big 2" and a "Little 2."
Despite all the talk about innovation, most Islamic finance remains plain vanilla Islamic banking, either retail or corporate.
I was conscious that although I had written about their individual, generally lamentable, financial histories, I had not looked at the UK’s Islamic banks collectively for a while. However, I was shocked to find I last did this in the 15 July 2015 issue, when I looked at their 2014 accounts. Six years ago!
The UK has always been the leader in Islamic banking outside the OIC. In my view it still is. During the 2000’s new Islamic banks almost raced to be established, and eventually there were six.
Like all other banks, they struggled during the global financial crisis. Despite the crisis ending over a decade ago, they still struggle. The biggest reason is probably the one that affects all banks. That is the low interest rate environment due to quantitative easing in dollars, euro and sterling. However, the Islamic banks have also suffered from being sub-scale, combined with bad banking decisions.
Two have exited the UK banking market: European Islamic Investment Bank, later renamed Rasmala, and ADIB (UK).
The four remaining divide naturally into a “Big 2” and a “Little 2”!
The largest is the UK only retail Islamic bank, Al Rayan Bank plc. Until the 2014 takeover by Masraf Al Rayan QSC of Qatar, it was called Islamic Bank of Britain plc and was heading for failure due to making losses every year and being unsustainably small. Injection of new capital by its Qatari parent allowed it to begin financing home purchases.
Al Rayan’s calendar 2020 accounts confirm it as the largest Islamic bank in the UK, with assets of £ 2,339m, equity of £ 150m, and profits of £ 3.8m. 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.
Not far behind is the corporate / investment bank, Bank of London and the Middle East plc with assets of £ 1,743m, equity of £ 234m, and profits of £ 0.9m. The return on equity of 0.4% should not please anyone at the bank.
Comparing the change of Al Rayan’s 2019 profits of £ 6.1m to 2020 profits of £ 3.8m with BLME’s change from 2019 profits of £ 8.7m to 2020 profits of £ 0.9m shows just how much greater was the impact of the pandemic on corporate banking compared with retail banking.
The first thing distinguishing the “Little 2” from the “Big 2” is that they have not published their 2020 accounts on their websites!
Each has their 2019 accounts published on its website but gives no reason why, five months after the year end, the 2020 accounts are not yet published.
The 2019 accounts of course tell us nothing about how the bank fared with the 2020 pandemic. However, they do show how much smaller these banks are than the “Big 2”.
Gatehouse Bank plc had 2019 assets of £ 685m, equity of £ 108m, and a loss of £3m. As this 2019 loss preceded any impact from the pandemic, I am not optimistic about their 2020 results.
The remaining bank, QIB (UK) plc had 2019 assets of £ 676m, equity of £ 67m, and 2019 profits of £ 4.4m. Again, I wonder how they found 2020.
Mohammed Amin is an Islamic finance consultant and former tax partner at PwC in the UK.