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There may be too few potential customers to serve cost effectively
Posted 20 July 2026
My December 2025 column for the magazine "Islamic Finance News" tackled a challenging topic. Is it possible to operate retail Islamic banking cost effectively in the UK?
My tentative conclusion was that even an internet-only retail Islamic bank will find too few customers to justify the significant fixed costs of operating a UK bank. However there may be scope for other Islamic financial services providers which do not seek to offer retail banking services.
You can read it below.
In my 5 November column “The UK no longer has any retail Islamic banks” I promised to consider whether UK retail Islamic banking is a lost cause.
Islamic Bank of Britain (now Al Rayan Bank) was set up with much publicity in 2004 as the UK’s first dedicated retail Islamic bank. (The UK’s conventional banks did offer some retail banking through Islamic windows, most notably HSBC Amanah.) Since then, there has been no other dedicated retail Islamic bank, the Islamic windows have closed, and now Al Rayan has exited the retail market.
Why?
Banking is a business. If an entrepreneur thinks that a business won’t make enough money to justify the capital it requires, they will stay away.
My first question is the addressable market. In the 2021 England & Wales Census, 3,868,134 people said they were Muslims. (Scotland and Northern Ireland also have a small number of Muslims, but I find the England & Wales census much easier to analyse.)
That looks like a reasonable target market, but 46% of them are under the age of 24, which makes them relatively unattractive customers, leaving only about 2.1 million people.
The next question is how much money do they have? Poor people are not good customers for financial services providers other than for exploitative moneylenders.
According to the UK’s survey of Households Below Average Income, about 40% of single adults have an annual income of £20,000 per year or less. I don’t see them as being profitable customers.
The other 60% is about 1.25 million people. That is still a reasonable target market. However, you need to exclude two subgroups:
I don’t have any data giving UK Muslims’ views on these two questions. However, my intuition is that most of the potential 1.25 million market falls away once you take those two subgroups into account. That is the main reason why UK retail Islamic banking has been so unattractive.
The other side of the equation is costs.
Islamic Bank of Britain was established with physical branches, which are a significant cost. Eventually it closed them. (See my 7 September 2022 article “Retail Islamic banks need to become internet-only.”) However, the other big cost in banking arises from meeting the regulatory requirements to be a bank, as well as the costs of running the IT.
My view is that, given the above costs, the small Muslim retail market in the UK is just too unattractive even for an internet-only bank, although I would like to be proved wrong.
There are a number of internet-only Islamic financial services providers which are not banks. That reduces the burden of their regulatory costs. Indeed, London is a hub for fintech of all kinds, including Islamic fintech. I do expect this to continue to grow since the target market, while small in absolute terms, is sufficiently large to be potentially profitable for very low-cost financial services providers.
In my view the Islamic financial services most needed by the market are asset management and home purchase finance. There are already Islamic providers in both markets, but I expect more to enter, and we need ways to reduce regulatory barriers.
The other big need is Islamic insurance (takaful), but that presents much bigger regulatory challenge given the high costs of being an insurance company, rather like the high costs of being a bank.
Mohammed Amin is an Islamic finance consultant and former tax partner at PwC in the UK.
