Our Blog

  • Islamic banking in retail: Reaching out to UK customers by daring to be different

    This article was originally seen in ‘Islamic Finance‘ published by Raconteur Media on 16th April 2013 in The Times.

    It is a thought piece on retail Islamic banking, featuring insights from Ogilvy Noor.

    RETAIL BANKING Islamic banks must demonstrate how they differ from discredited sections of the banking industry if they are to thrive in the UK, as Pamela Ann Smith reports

    With roughly 2.7 million Muslims in the UK, Islamic retail banking appears at first glance to have a ready-made market. But appearances can be deceiving. The Islamic retail banking industry continues to struggle to gain traction in the UK, a situation exacerbated by the relative lack of options and awareness of the Shariah banking model among Muslims.

    The withdrawal of global giant HSBC from the Islamic finance market in the UK six months ago, highlights that challenge. HSBC’s Islamic banking offshoot, HSBC Amanah,  had been operating in the UK for more than ten years and accounted for the bulk of the $19 billion in Islamic financial assets held in the UK, according to a report by the UK Islamic Finance Secretariat.

    Its decision to limit its role in Islamic banking primarily to Saudi Arabia and Malaysia was seen by many analysts as a sign that the sector’s low level of profitability did not warrant HSBC’s operating costs and staffing levels in this specialist area as it restructured its global business.

    As a burgeoning industry, there are a number of challenges to overcome. The Islamic Bank of Britain (IBB), the UK’s first standalone Islamic retail bank, has faced financial difficulties in the wake of the financial crisis that erupted in 2008. IBB, which is reported to have attracted more than 50,000 loyal customers among the Muslim population in the UK, has been re-capitalised by its majority shareholder, the Qatar International Islamic Bank, following a period of restructuring, staff reductions and operating losses.

    Imran Pasha, head of sales and services at IBB, says the bank has seen strength in the past year. For the first three quarters of 2012, home financing increased by 63 per cent and long-term savings deposits increased by 43 per cent. But more has to be done to give the industry the boost it needs.

    A lack of education on how Islamic products work is one of the main challenges. “Our main competitor is still conventional banking and the lack of education about Islamic finance among consumers is the hurdle we all need to overcome,” Mr Pasha says.

    Raising awareness is very much on the UK’s radar as the government bolsters support of the industry through its recently announced Islamic Finance Task Force. But it falls to Islamic banks to focus more on addressing customers’ needs, as well as their profit models, says Shelina Janmohamed, vice president of the branding consultancy agency, Ogilvy Noor.

    Their research, she explains, shows that “more than 90 per cent of Muslims say that faith affects their consumption”.  Principles, such as charitable giving – the payment of zakat – and corporate giving, particularly to social and community enterprises and organisations, as well as the avoidance of interest and speculation, need to be taken more into account, she says.

    In essence, Islamic banks need to show how they differ from traditional banks, which many Muslims associate with the financial ills currently facing the economy. Part of that is improving efforts to explain why their offerings are Sharia-compliant in a much simpler way to avoid the present confusion and scepticism that exists in the minds of many of their potential Muslim customers in the UK.

    Still, there are pockets of strength in Islamic banking which highlight the potential for the overall industry. Bank of London and the Middle East (BLME) and Gatehouse Bank, for instance, are thriving and poised to grow significantly despite the overall weakness of the UK economy and the rise of stiff new banking regulations. Their focus, however, tends to be on wholesale banking.

    BLME reported a 67 per cent rise in net operating profits for 2012 to £7.3 million due to strength in asset-based lending, acquisition finance and commodity trade finance, as well as to the ongoing success of its core businesses, leasing and property finance.

    London-based Gatehouse Bank sees opportunity in wealth management and wholesale investment offerings in the UK and US property markets. These include corporate headquarters, factories and retail premises in the UK outside London, where cash yields are seen as particularly strong, as well as a prime office development in the City of London.

    Its latest focus highlights the continuing attraction of UK real estate for Muslim investors, both in the UK and Europe, not to mention the Arab world and Asia. Ernst & Young estimates that there is around $360 billion (£197 billion) to $400 billion (£263 billion) of individual and institutional savings globally waiting to be tapped by the industry.

    But for Islamic retail banking, in its purest sense, to really take off in the UK, more needs to be done to attract business from Muslims and non-Muslims alike. Creating competitive products will go a long way in accomplishing that goal, says IBB’s Mr Pasha. At IBB, for instance, 79 per cent of applications for its 24-month fixed-term deposit product were from non-Muslim customers between December and February 2013.

    Omar Shaikh, executive board member of the Islamic Finance Council, says he is encouraged by the fact that many British consumers are increasingly looking to see some of their money invested in a more ethical way. “If Islamic finance focuses on the moral and social impact element, then it can appeal to non-Muslims, thereby expanding the market penetration of Islamic banks,” he says.

    British Muslims want Islamic banking


    A 2013 study of British Muslims, carried out by Cardiff University and the Islamic Banking and Finance Centre UK, identified strong demand for Islamic banking, financial products and services.

    Aspirations for a fully transparent and socially responsible service provider, actively supporting local communities and businesses, were high.

    The study undertook qualitative investigation with six focus groups of British-Muslim consumers originating from Pakistan, Bangladesh, India, Somalia and the Middle East.

    It called for an industry-wide initiative looking at legal, social and economic implications of establishing and promoting Islamic financial service provision in line with key ethical principles of Islam.

    Other key recommendations included establishing centres of excellence for Islamic rulings (Fatwa), and quality and assurance. High-quality staff training and work-based learning schemes, emphasising the relevant key Islamic principles, were also recommended.

    The study advised funding local community projects, creating mass-awareness in association with local mosques, community centres, key spokesmen and Islamic finance experts.

Comments are closed.