Sitting in the office is so yesterdayMay 27, 2015 4:49
UK’s Islamic banking market strong
As Times of London declares “Shariah-compliant banking products a 'huge flop’ in Britain,” writer contends the market is driven by investors from abroad.
June 28, 2010 11:07 by Rasha Reslan
The headline in The Times of London a few days ago could not have been more explicit: “Shariah-compliant banking products a ‘huge flop’ in Britain.” It is a pity that the writer was not more discerning or informed about Islamic banking in Britain.
The two industry insiders on whose views the story is based are neither experts in Islamic finance nor bankers. ‘Baron’ Junaid Bhatti was part of the team that established Islamic Bank of Britain (IBB), which erroneously claims that it is the first Shariah-compliant bank to be approved by the UK.
The other individual quoted was Mohammed Qayyum , Director General of the Institute of Islamic Banking & Insurance, an institution which has spectacularly failed to make any impact since its establishment by its founder, the late Muazzam Ali, because of serious organizational and corporate governance deficiencies.
The UK, as the Bank of England and the erstwhile Financial Services Authority (FSA) will confirm, does not authorize Shariah-compliant or Islamic banks, for neither the words ‘Shariah-compliant’ nor ‘Islamic’ appear in the UK Banking Act. In fact they could only appear through the passing of primary legislation.
The five so-called Islamic banks in the UK — IBB, European Islamic Investment Bank (EIIB), Bank of London & the Middle East (BLME), European Finance House (EFH) and Gatehouse Bank — are all authorized under the above Act, but their internal operations are conducted under Islamic banking principles and satisfy the provisions of the Act.
In fact, the first bank to operate under the above process was Al Baraka International Bank in the early 1990s, but unfortunately in the aftermath of the BBCI and INGs Baring banking collapses, Al Baraka was forced to surrender its licence because it could not satisfy the Bank of England on various new provisions that came into force especially relating to diffused ownership rules and new corporate governance and compliance regulations.
The assumptions in The Times article are fundamentally flawed. Islamic finance has been traditionally driven in the UK not by the demand of its 2 million or so Muslim population and those others who are interested in ethical or socially responsible finance and investment, but by high net worth Muslim investors from the Gulf Cooperation Council (GCC) countries, Malaysia, Brunei, Singapore, Indonesia, South Africa and Turkey, who were starting to demand from their private bankers in London, Geneva and New York, financial products that were consistent with Shariah principles.
At the same time, multinational companies in the early 1980s were starting to access millions of dollars of short-term liquidity requirements using Commodity Murabaha products based on underlying transactions on the London Metals Exchange (LME).
Of the five authorized banks operating under Islamic financial principles in the UK, only one is a commercial bank. The rest are all investment banks. As such, to expect a single commercial ‘Islamic’ bank to make any impact even after six years, a very short gestation period for any bank, is simply ill-informed. It is financially illiterate to talk about IBB in the same way as the other four ‘Islamic’ banks in the UK, because they have different product profiles and client constituencies.
IBB in fact is woefully under-capitalized. As such, its scope is limited. Its senior management were inexperienced and its business plan was flawed from the start. Michael Hanlon, the first CEO of IBB, in an interview with this writer publicly stated that he knew nothing about Islamic banking and therefore he was ‘learning on the job’.
Some of the founder members made small fortunes from the initial appreciation of IBB private placements, albeit the partial listing on the Alternative Investment Market (AIM) was a major disappointment, because British Muslims were simply not interested in investing in such a high risk venture. IBB shares since then have failed to make any investment impact, with many small investors simply holding on to the shares either because of notions of Muslim solidarity or in the hope that the shares would eventually rally and perhaps they can recover some of the value of their initial investment.
IBB’s initial product profile was wholly inadequate, concentrating on current accounts based on the Wadiah concept and the odd savings products, usually based on the Commodity Murabaha transactions. In the first three years, the Bank was simply not interested in launching Islamic home financing and small ticket leasing (Ijara) products. This is largely due to its low capital base which would directly impact on its risk weighting (the money banks have to set aside under FSA rulings to cover any mortgage lending or financing). In the end, IBB was forced to white label the Alburaq Islamic Home Financing Scheme based on Diminishing Musharaka developed by ABC International Bank and Bristol & West, which is part of the Bank of Ireland Group.
Similarly, the Muslim business and small-and-medium-enterprise (SME) hardly featured.
At the same time, to headquarter the bank in Birmingham because it got a good real estate deal from the local Council was short-sighted, because London is the financial center of the UK if not the world and the Islamic finance hub of Europe. Endless commuting to London whether to meet regulators at the FSA, other allied services, shareholder meetings and customers simply bloated operating expenses.
For the above shortcomings, the FSA and the founding shareholders of IBB bear some of the responsibility. If IBB was well capitalized with an experienced Islamic banker at the helm and with a well-thought out business and product plan, then its position may have been much different. Perhaps the ideal would have been to establish a joint venture with an existing high street brand with a tailor-made distribution network.
The expectations that UK high street players such as HSBC, Lloyds and Barclays inadvertently raised were simply not realized. The community banking model under the UK’s financial inclusion policy, which is what IBB effectively is, was simply not attractive to the likes of the above three.
HSBC Amanah is spectacularly successful in its consumer banking operations in the GCC, Malaysia, Brunei and others, yet its similar operations have failed in the UK and the US. A few years ago it stopped its Islamic home financing offerings in the US market and in the UK they have failed to take off.
The mainstream banks are simply not prepared to allocate enough marketing resources to promote their Islamic finance products, which perhaps indicates that their commitment at least in the Western markets are half-hearted. These may be for political reasons or simply because that the development costs are too high to justify a profitable return horizon that is at best medium-term. In reality, HSBC Amanah and Lloyds give the impression that they are living in denial about their Islamic financial offerings in the UK.
Very often their customer advisers have very little clue about their Islamic finance product offerings, which hardly inspires any confidence or loyalty from potential clients. Indeed HSBC would struggle to live up to any pretensions of being ‘the world’s local Islamic bank’.
HSBC Amanah like others has reviewed its growth plans following the global financial crisis. “The growth aspirations are still there but there’s a greater sense of caution and prudence in managing future growth strategies. We would like to think that Islamic finance is here to stay in the UK, but it will not be a quick win,” stressed Amjid Ali, Senior Manager, HSBC Amanah and UK Head, in a recent interview.
With the world coming out of economic recession and on the path to recovery, it remains to be seen how the likes of HSBC Amanah deal with the above aspirations especially in community banking markets such as the UK. Perhaps here lies the fundamental flaw in the approach of the mainstream banks. In the core GCC and south east Asian markets Islamic banking is seen as mainstream activity, but in non-core markets such as the UK, US and perhaps the EU it is seen as a niche community banking activity. The one constant, however, that does not change is the cost of product development and the likely return on investment.
The universal challenges facing Islamic banking is not confined to the UK market — the lack of human capital and talented professionals; the poor level of product knowledge by customers of Islamic banking; and the lack of standardization.
The UK government, as the facilitator of Islamic finance in the UK, has played an admirable role. In fact, the UK has more Islamic finance product enabling legislation in place than most Muslim countries. The latest, Financial Services and Markets Act 2000 (Regulated Activities) (Amendment) Order 2010: Alternative Finance Investment Bonds, was adopted in February this year.
Of course the new Cameron Government can be more proactive especially in accessing Islamic finance products such as Sukuk as off balance sheet financing in its debt reduction plans. Indeed that could be the biggest boost Islamic finance needs in an aspiring market such as the UK.
It was encouraging to hear David Bailey, Manager, Financial Services Authority (UK) reiterating at the IFSB Sukuk Seminar in London earlier this month that Sukuk have an important role for Islamic institutions and that the UK remains committed to provide a level playing field for Islamic finance. “Changes will continue to be made, where necessary, to achieve this policy goal,” he added.
Sukuk are important to meet the lack of availability of short term, liquid money market instruments (international issue). In fact, the FSA expanded the liquidity regime to incorporate Islamic Development Bank Sukuk. The UK approach is to provide a level playing field for issuance of Sukuk with comparable conventional products and to achieve the goal of facilitating Islamic finance within the UK without compromising regulatory standards.