Islamic Bank of Britain
Where is it all going wrong?
Islamic banking versus Conventional
banking
Islamic banks
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Islamic banks operates and functions on
the principles of Islamic law i.e. Shariah.

There is risk sharing between the investor
and the user of funds.
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Islamic banks focus on building a
partnership relationship with investors so
understanding the customers business is
vital.
There are no provisions to charge
additional money (interest) from defaulters.
Deposits are based on the principle of alwadiah, therefore Islamic bank can only
guarantee deposits for deposit account.
Depositors are guaranteed repayment of
their funds, however if the account is based
on the mudarabah concept, client have to
share in a loss position.
Conventional banks

Conventional banks operates and functions
fully on manmade guidance, there is no
ethical or spiritual consideration.

The rate of interest is already
predetermined for the investor b the user of
funds.

The fundamental function of conventional
banks is to lend money and getting it back
with interest.

It charges additional money (penalty and
compounded interest) in case of defaulters.
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Deposits are guaranteed.
The Islamic Bank of Britain
• UK's first FSA (Financial Services
Authority) approved Islamic bank
established Sept 2004
• First standalone Islamic retail bank in the
Western world
• Launched on the London Stock Exchange AIM market - on 12 October 2004
• Eight branches throughout the UK
•
The Islamic Bank of Britain
• Innovative appeal
– First branch opened September 2004 in Edgeware Road
– Operational headquarters in Birmingham with branches
Leicester and Manchester
• Potential market
– UK has 1.8 million Muslim residents plus many visitors
– Many Muslims in professional occupations with good
salaries
• Stress on Islamic values
– Faith and trust
– Also aims at value and convenience
Islamic Bank of Britain accounts
• Current account
– No interest payments or receipts
– Works on basis of a “Qard”
– Chequebook and multi-functional bank card provided
• Savings account
– 60 Day Notice Account/ Fixed term deposit account are in accordance
with the Wakala Principle of Islamic Finance
– Direct Savings account Operates on mudarabah basis with £1
minimum balance
• Term deposit savings account
– Minimum deposit £5,000
– One, three or six months earns 3.25%, 3.50% & 3.75%
• Treasury deposit
– Minimum £100,000 for 1, 3 or 6 months
– Murabahah operation with funds invested on in London Metal
Exchange
Islamic Bank of Britain finance
• Personal finance
– £1,000 to £20,000 for 12 to 36 months
– Operates through tawarruq with bank buying shariah compliant
commodities that are sold to client on a cost plus profit basis
– Client’s agent sells commodities and proceeds credited to client’s
account
– Client repays bank through deferred payments
• Secured funding
– Car finance
– The Home Purchase Plan is based on the accepted and widely
used Islamic financing principles of Ijara (leasing) and Diminishing
Musharaka (reducing partnership).
• Business Banking
– Business Current + Savings
– Business Finance
– Commercial Property
Critique of Islamic Bank of Britain
• Clear mission
– Vision and values well expressed
– Stress on positive and not simply prohibitions
• Publicity material
– All in English, but some clients may prefer Urdu or Arabic
• Limited product range
– Primarily a savings institution that cannot meet all customer
need
– Tawarruq difficult to market in UK as client scepticism
• At fringe of market
– Very small bank competing with conventional banks offering
Islamic windows such as HSBC Amanah and Lloyds TSB
Critique of Islamic Bank of
Britain
• Strategy
– No primary research undertaken.
• Only publicly available information used by Board to
make a judgement on the viability of establishing a small
UK retail bank
– Viability of a UK Islamic retail bank hinges upon
three main factors
• benefit from first mover advantage
• Large Muslim market in the UK which should support the
demand for IBB Sharia’a compliant banking products
• IBB believes that it will be able to generate returns on its
Sharia’a compliant banking products which are at least
equivalent to those enjoyed by conventional banks.
Critique of Islamic Bank of
Britain
• Target Markets
– Sharia’a compliant retail banking proposition
as an alternative to conventional offerings on
the market
– primarily be attractive to UK Muslims and
therefore initial marketing efforts
– IBB planned to identify strategic customer
segments such as high net worth customers
and the small business
Critique of Islamic Bank of
Britain
• Five years since its inception and IBB has never
made a profit.
– Company has reported combined losses of almost
£45 million pounds, and its shares have lost more
than 95% of their value since the highs enjoyed
during the early years.
• It holds a woeful market share for the industry
• 17 August 2010 IBB required additional capital
of £20m via a placing of new shares with Qatar
International Islamic Bank ("QIIB").
Islamic Bank of Britain
Financials
Source : londonstockexchange.com
Islamic Bank of Britain
Financials
Source : londonstockexchange.com
Challenges Facing the Growth of
Islamic Banking
• Majority of Muslim clients already conduct business with the retail bank
– differentiated products pointless?
• Ability to attract new clients based on selling Islamic products is limited:
– Lack of mobility of Muslims who already hold conventional retail accounts
– Market share of Muslims in non-Muslim country, (UK )who do not participate in the
conventional financial system due to religious purposes, is trivial .
• Islamic finance attracted tiny proportion of 1.5 million Muslim adults in the UK
– Myth that British Muslims are exceptionally devout + will always choose the ‘Halal’
option if it’s offered to them.
• most Muslims will lie and pretend to be far more devout than they are in reality
• hardly makes sense to appeal to a sense of religious devotion that isn’t there
– Islamic banks in the West need to face the reality that Muslim customers are not
much different from mainstream customers
Challenges Facing the Growth of
Islamic Banking
• Bank needs to serve + attract client/ businesses beyond the
Muslim community in order to grow in scale and scope.
– Obstacle the banks face is the very nature and principle of Islamic
financing: Profit/Loss Sharing (PLS)
– Why would non-Islamic business / non-religious Muslims take finance
on PLS Vs borrow at a fixed rate?
– Adverse Selection issue: Company with a sound business plan +
high potential profits more likely to finance via conventional system
i.e. obligated to pay a known rate Vs sharing their potential profit
with bank.
– However, a more risky venture will tend to prefer the PLS system,
where the Islamic bank will share in the losses if the project fails,
while the business will escape from significant repercussions
Challenges Facing the Growth of
Islamic Banking
• Significant factor stunting the growth of the industry =>
ineffective way Islamic finance has been marketed to the
public:
– public awareness and understanding of the industry /products
remained limited and muddled.
– boring technical explanations and emotional blackmail may not
be the most effective way to win customers.
– it’s the complete opposite of how financial services are
marketed by everybody else.
– “If you were the average customer would you rather join a bank
that promises to save your eternal soul thanks to the
operational hoops it jumps through so it can conform to Islamic
law? Or a bank that promises to be friendly, convenient, good
value for money and also offers you a credit card that will make
you the envy of your friends and family?”
Challenges Facing the Growth of
Islamic Banking
• Requires tremendous amount of equity capital:
– To provide for religiously sound investments.
– Capital requirements
• Basel – II does not cover the peculiar nature of risks associated with
Islamic finance.
• Pure Islamic banking products force investors to share losses as well
as profits. therefore they are like an investment fund. Investment
funds do not require capital adequacy rules because the owners of
the fund are expected to accept losses if they occur. Therefore
Islamic banks should not be subject to capital adequacy rules.
• FSA does not support separate legislation to facilitate Islamic banking.
– FSA maintains a “no obstacles,no special favours” approach to regulation
of islamic banking.
– FSA is unwilling to relax standards for any one bank/ sector.
Challenges Facing the Growth of
Islamic Banking
•
•
Deposits in an islamic bank should be treated differently than those of a
conventional bank.
– i.e. they are fiduciary funds rather than a liability on the balance sheet.
• conventional banking deposits are considered a loan on the bank
balance sheet.
Islamic banking deposit accounts are actually profit sharing investment
accounts (PSIA) designed under the Mudarabah partnership contract
between the bank and the customer.
– However these PSIA do not meet the western legal definition of deposit
because the customers principal or a return on this principal is not
guaranteed by the bank.
– True Islamic PSIA are more akin to an investment fund. Therefore they
do not meet the criteria to be defined as a deposit account per
conventional western banking regulations.
• The Islam Bank of Britain was not allowed to offer PSIA. They had to
offer accounts that were capital certain (protected against losses).
therefore they offered accounts that guaranteed the capital but gave
the account holder the option to share any losses if they chose.
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Challenges Facing the Growth of
Islamic Banking
•
Islamic banks face difficulty due to FSA liquidity requirements
– An extra burden on their capital requirements and structures
•
Islamic banks (outside of Malaysia or Bahrain) face issues placing liquidity
and their reserves with central banks:
– western central banks currently don’t have Islamic papers / structures to
accommodate or absorb Islamic liquidity / reserves.
» ......continued on next slide
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Challenges Facing the Growth of
Islamic Banking
•
.......continued from previous slide
– UK to date has not issued sovereign Shariah-compliant monetary policy
management products (E.g. Islamic bonds).
• =>UK-based Islamic banks can’t invest in UK government papers for
their liquidity requirements as these are interest bearing (Riba!)
• UK Islamic banks instead use private sector schemes
– E.g. based on commodity Murabaha trading with the underlying
contracts being those traded on the London Metal Exchange.
•
However- FSA has widened its definition of liquid assets.
– Now allows Islamic bonds (Sukuk) issued by the Islamic Development Bank
to count toward the liquidity instruments of Islamic banks.
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Islamic banking in Malaysia
 The Islamic Banking Act (IBA) which became effective
on 7 April 1983 is the legal basis for the establishment
of Islamic banks in Malaysia.
 As with other licensed banks, Bank Negara Malaysia
(the Malaysian Central Bank headquartered in Kuala
Lumpur) has powers to supervise and regulate Islamic
banks under the IBA.
 Bank Islam Malaysia Berhad (BIMB) is the first Islamic
bank in the country and it commenced operations on 1
July 1983. BIMB was listed on the Main Board of the
Kuala Lumpur Stock Exchange on 17 January 1992.
 A second Islamic bank, namely Bank Muamalat
Malaysia Berhad (BMMB) commenced operations on 1
October 1999.
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Islamic banking in Malaysia
Contd..
• In 1993, commercial banks, merchant banks and
finance companies begun to offer Islamic banking
products and services under the Islamic Banking
Scheme (IBS banks).
 The IBS banks were required to separate the
funds and activities of the Islamic banking
transactions from the non-Islamic banking
business (conventional banking) to ensure that
there was no co-mingling of funds.
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Islamic Banking in Malaysiacontd..
 Structure:
 To ensure that Islamic banks and IBS banks
function in a manner consistent with the principles
of Shariah, they have to set Shariah Committees to
guide them on Shariah matters.
 Also, the banks can also seek the advice of the
Shariah Advisory Council – the highest Shariah
body set up at Bank Negara Malaysia, to ensure
that there is uniformity in views and practices
across board.
 The Shariah Committees and the Shariah Advisory
Council are made up of academicians and Shariah
experts in Islamic banking and finance.
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Financial Institutions offering Islamic banking services
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Banks:

Finance Companies
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AFFIN Bank Berhad
2. Alliance Bank Berhad
3. AmBank Berhad
4. Citibank Berhad
5. EON Bank Berhad
6. Hong Leong Bank Berhad
7. HSBC Bank (M) Berhad
8. Malayan Banking Berhad
9. OCBC Bank (Malaysia) Berhad
10. Public Bank Berhad
11. RHB Bank Berhad
12. Southern Bank Berhad
13. Standard Chartered Bank Malaysia
Berhad
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AFFIN-ACF Finance Berhad
2. AmFinance Berhad
3. EON Finance Berhad
4. Hong Leong Finance Berhad
5. Mayban Finance Berhad
6. Public Finance Berhad
7. Southern Finance Berhad
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Financial Institutions offering Islamic banking services
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Merchant Banks
Discount Houses
 AFFIN Merchant Bank
 Abrar Discounts Berhad
Berhad
 Alliance Merchant
Berhad
 AmMerchant Bank
Berhad
 Commerce International
Merchant Bankers
Berhad
 2. AFFIN Discount
Berhad
 3. Amanah Short
Deposits Berhad
 4. CIMB Discount House
Berhad
 5. KAF Discounts Berhad
 Malaysia Discount
Berhad
 7. Mayban Discount
Islamic Banking in Malaysia-contd..
Islamic banks or IBS are required to display the above
Islamic banking logo.
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