Islamic Retail Banking In The UK - TIEF 2014tief2014.org/pdf/report/materiali/choudhury.pdf · 2015. 7. 1. · Retail – banking, savings & home finance 1.16M (76%) IBB target 36%

Islamic Retail BankingIn The UK

Sultan ChoudhuryCEO

Islamic Bank of Britain (IBB)

18 November 2014Turin Islamic Economic Forum

Banking you can believe in

Overview of IBB


Islamic Bank of Britain

1st

wholly Sharia

compliant retail bank

Est. 2004

58k > €643m > €521m 30 products


Good value

Ethical alternative to conventional

Founded in 2004Background

Islamic Finance

Staff of 120

Over 50,000 customers

UK’s First wholly Sharia compliant retail bank

Authorised & regulated by FCA & PRA

Member of FSCS

Head office in Birmingham

‘Banking you can Believe in’Never invest in prohibited areas

Operates without interest

Based on trade, entrepreneurship & risk-sharing

Asset based & backedOversight via SSC & SCO

Our values

Sharia compliant

Community orientated

Secure

Pioneering

Over 30 products

Part of MAR

Muslim & non-Muslim

High brand awareness levels

Different


An Introduction to IBB

Financing up 72%HNW – wealth mgmt & premier banking

Wide product range

Outstanding customer service

Sustained growth

Deposits up 50%

Total assets €521m

Rapidly growing (3% to 5% in 10 years)

UK Muslim market

1.53M adult UK Muslims

Strong customer loyalty

Young, have children, employed, less affluent than average

Retail – banking, savings & home finance

1.16M (76%) IBB target

36% of Muslims use Islamic finance

70% of Muslim non-users would consider

Business – banking and property finance

GCC – property finance

Integrated, multi channel

6 branches & agencies

Telephone & online banking

Online acquisition (14%+)

UK based, multi-lingual call centre


An Introduction to IBB

Branch/Agency

IntermediaryContact Centre

IBB distributionchannels

Distribution Channels

Self Service


Est. 2004

>50k > £330m > £250m 30 products


IBB Key milestones

2004 2005 2006 2007 2008

IBB is the first standalone Sharia compliant Bank to receive an FSA Licence

A further four branches are opened across the UK

Online banking is launched, expanding reach beyond the branch network

IBB launches an Internet savings account

IBB launches the Home Purchase Plan

The first branch is opened in London

IBB launches furtherproducts including a Current Account and unsecured finance for personal and business customers

IBB launches its Young Persons Savings

IBB launches additional savings products including the 60 Day Notice Account and WakalaTreasury Account

IBB launches its first savings account

Telephone and postal banking are launched

The Bank launches its first ever commercial property finance product

Following the credit crunch, the Islamic model of banking proves more resilient than the conventional banking model

Since being granted a Banking licence, IBB has been busy building it’s proposition

Est. 2004

>50k > £330m > £250m 30 products


IBB Key Milestones

2009 2010 2011 2012 2013 2014

IBB launches itsPremier Banking Service

IBB adds Wealth Management Services to its proposition

The Buy to Let Purchase Plan is launched

Masraf Al Rayan(MAR) announces its intention to purchase majority shareholding

The UKs first Sharia compliant ISA is launched by IBB

IBB announces that Masraf Al Rayan has become the new parent company

HPP is launched in Scotland

Home Purchase Plan Premieraimed at GCC clients is added to the Premier proposition

IBB launches the120 Day Notice Account

IBB works with the UK Government to provide a HPP backed by the Help to Buy Guarantee

IBB launches its Fixed Term Deposit Savings Accounts

IBB’s table topping FTD proves to be popular. The majority of new customers are non-Muslim

IBB continues to develop and an extensive range of products and services

In 2013, IBB began a programme to drive online sales. This programme included:

• A brand new, fully mobile responsive, website

• Significant conversion enhancements to online customer

acquisition process

• Targeted pay per click advertising (e.g Google Adwords)

• Social engagement with prospects (Facebook, Twitter)

• Video and animation on website and through YouTube

• Partnership with aggregators (e.g. MoneySupermarket.com)

• Advanced web call tracking

Programme of online marketing improvements


Programme of online marketing improvements


UK Retail GCC & Commercial

Current

NewUse starts December 2014


‘Rebrand’ to Al Rayan Bank

What will change and what won’t?

• Company name - Al Rayan Bank PLC (from December 2014)

• Registered address - Knightsbridge, London (from December 2014)

• Web site address – www.alrayanbank.co.uk

• Evolution of the brand values:

� Tag line – ‘Banking you can believe in’

� The change from ‘IBB’ to ‘Al Rayan Bank’ will involve an evolution of our five brand values. Our values are the core principles of the Bank and the key to what makes us different and good.


Sharia compliant

Pioneering AspirationalDedicated Dependable

Changes combined in practice


Islamic Banking Underpinnings


Islamic Finance


Video 1

• Requirement for ethical conduct

• Prohibition of Interest (riba)

• Based on Real Assets

• Sharing of Risk and Reward

• Avoidance of excessive uncertainty (gharar)

• Prohibition of gambling (qimar)

• No short selling

• Debts cannot be assigned at difference from face value

• Activities must be sharia compliant (no casinos, alcohol etc.)

Basic Principles


These principles are derived from the Sharia


In Practice

Video 2

G Consolidating

Assets

L Platinum

Pensions

F Accumulated Wealth

H Balancing

Budgets

I Stretched

Finances

K Seasoned

Economy

J

Established

Reserves

N Traditional Thrift

M Sunset Security

D Growing Rewards

E Family Interest

A Bright Futures

B Single Endeavours

C Young Essentials

Recognised Savings Market

Recognised Mortgage Market

Regular savings & children’s savings

First time home buyers

Lump sum investments & savings

Main mortgage market


Experian’s segmentation model – 14 ‘Groups’ then split into 50 ‘Types’

IBB currently has 15,800

customers who fall into one of the 30 priority

‘Types’ = 34.1% of the

IBB base

There are 637,400 UK

adult Muslims who fall into one of the 30 priority

segments = 41.7% of the Muslim market

IBB’s Opportunity


Income

Origin

Age, gender & children

Investments

Property

Market size1.53M UK adult Muslims = 3.12% of UK adult population

Pakistan = 42.1%

IBB customers = 3.32% of UK adult Muslims

763.7K UK Muslim households = 3.01% of UK households

More male vs. UK –58.1% vs. 48.3%

Young vs. UK –72.4% aged 18 to 45 vs. 51.5%

Bangladesh = 10.5%

Lebanon = 7.9%

Turkey = 8.3%

Morocco = 3.2%

Less affluent vs. UK – 30.1% earn under £10k vs. 27.7% 1.0% earn over £100k vs. 1.3%

More children vs. UK –52.6% have family under 18 vs. 28.1%

More employed vs. UK – 59.1% employed full time vs. 50.3%

Fewer shares vs.UK – 8.7% vs. 16.8%

Lower value of savings & investments vs. UK – £24.2K vs. £38.2K

More renting & Council housing vs. UK – 40.5% vs. 32.1%

More terraced housing & flats vs. UK – 64.3% vs. 44.8%


Key Demographic Facts

5

4

3

2

1 Child’s savings account

Regular savings account

Property investment – Buy to Let

Cash ISA

Instant access savings account


The Top 5 Savings Products for Muslims

62% of all UK adult Muslims are concentrated in 20 postal areas running from London,

through the Midlands, to the North


Muslim Distribution across the UK

Rank

(Muslim 18 +

Population)

Postal

Area

Postal Area

Description

Muslims

Count

Adults

18 +

Penetration

into area

(%)

1 B Birmingham 137,139 1,414,030 9.70

2 E London E 127,774 651,547 19.61

3 BD Bradford 71,055 429,445 16.55

4 N London N 62,385 605,115 10.31

5 M Manchester 52,645 890,465 5.91

6 IG Ilford 44,675 232,704 19.20

7 NW London NW 43,206 437,309 9.88

8 OL Oldham 39,406 343,855 11.46

9 BB Blackburn 38,982 370,783 10.51

10 SW London SW 36,785 717,410 5.13

11 HA Harrow 34,737 337,262 10.30

12 SE London SE 33,822 743,209 4.55

13 LE Leicester 33,815 760,210 4.45

14 W London W 33,301 443,497 7.51

15 UB Southall 31,427 255,983 12.28

16 S Sheffield 27,593 1,071,499 2.58

17 LU Luton 25,320 251,169 10.08

18 WF Wakefield 24,771 390,966 6.34

19 SL Slough 24,749 272,467 9.08

20 TW Twickenham 24,622 360,656 6.83

12 of the top 20 postal areas are in the South, representing

522,800 adult Muslims (55% of the population of the top 20 areas)

South

South

South

South

South

South

South

South

South

South

South

South

Midlands

Midlands

North

North

North

North

North

North

2 of the top 20 postal areas are in the Midlands, representing

170,900 adult Muslims (18% of the population of the top 20 areas)

6 of the top 20 postal areas are in the North, representing 254,400

adult Muslims (27% of the population of the top 20 areas)


Top 20 postal areas by volume of Muslim Population

IBB Survey of consumers’ attitudes & understanding of Islamic Finance conducted by 2Europe in

Aug 2013. 300 consumers of which 100 where non-Muslim

66% of those surveyed felt that Sharia compliant finance is appropriate in a modern western

society, such as the UK

60% overall agreed that Sharia compliant finance is relevant to all faiths

with 57% agreement for non-Muslims surveyed

81% of IBB’s customers are likely to use Sharia compliant finance again; the results being the same

for Muslim and non-Muslim customers

36% of Muslims currently use Sharia compliant finance, of which 9% use it exclusively.

A further 45% of Muslims, who don’t currently use Sharia compliant finance, are likely to consider

doing so in the future.


IBB Survey of Customer Attitudes

49M adults in the UKAverage non-Muslim is 7 times less likely to

purchase Islamic finance than average Muslim (Research for IBB by 2Europe, 2013)

1.53M adult Muslims9% exclusively use Islamic

finance; 27% use some Islamic finance; 45% will consider Islamic finance

Limited levels of non-Muslim interest62% of non-Muslim prospects say they are

“unlikely to use Islamic finance in the future”

But when they do buy, they are loyal

N.B. Some very anti-Islamic (finance) sentiment

• Some from Muslims not believing or

misunderstanding• Some from non-Muslims,

generally anti-Islamic

Target Group 2 –Interested non-Muslims

Use PR and Pay Per Clickadvertising to allow those interested to self select

Target Group 1 -Muslims

Use face to face sales and direct marketing to target best prospects

Too large an audience for IBB to market to all


Overview of the UK market & summary of IBB’s targeting strategy – 2 key audience groups

£4M

£22M


Strategy has generated a ten-fold increase in direct sales in two years, with further growth in 2014

Strong Growth in last 2 years


£-

£50,000,000

£100,000,000

£150,000,000

£200,000,000

£250,000,000

£300,000,000

£350,000,000

£400,000,000

£450,000,000

£500,000,000

Real Estate Assets

£-

£50,000,000

£100,000,000

£150,000,000

£200,000,000

£250,000,000

£300,000,000

£350,000,000

£400,000,000

£450,000,000

£500,000,000

Deposits

Drivers of contemporary Islamic Banking?



High Growth Rate Industry

• Global sharia compliant assets $1.46bn and estimated to be $2tr by end of 2014

• Islamic Funds $74bn

• Takaful premiums > $30bn

• UK est. for sharia assets is $19bn

• UK has c. 20 banks offering IF

• LSE has issued over 50 sukuks >$34bn

• 25 law firms

• Major infrastructure such as Shard & Olympic Village

⇒⇒⇒⇒ Whilst a nascent industry, still represents only 1% of global assets. Plenty of potential as Muslims are 23% of global population

• Commitment from Retail customers

• More Islamic financial services products being developed

• Resurgence of Muslim Cultural values

• Strong growth of OIC (Organisation of Islamic Conference) countries (fuelled by Oil prices)

• Capital is being provided by institutions as well

• The industry is becoming more standardised and convergent (e.g. common accounting and auditing standards AAOFI)


Factors Driving Islamic Banking

• Economic Reasons

– Potential for large capital inflows into City of London due to the size of the Global market and strengthen the UK as a financial centre

– English commercial law is used commonly used for large contracts – so UK professional firms are doing well out of it

• Combating Financial Exclusion

– Enabling more access to financial services to UK’s 2-3 million Muslims

• Regulations

– Create a regulatory framework that recognises Islamic nature of products and affording users of those products the same consumer protection

• Taxation Regime

– Changes to engender a level playing field for Islamic Finance products


UK Factors

• The biggest obstacle in Western economic systems is the taxation environment

• In Islamic finance the buying and selling of ‘real’ assets usually creates a taxation impact

• There is a requirement to create a “level playing field” so that the Islamic finance transaction is treated as a finance transaction

• In UK nearly every Finance Act since 2003 has had taxation legislation to adjust for sharia compliant products


Taxation Regime

2003

Finance Act 2003: Relief from double Stamp Duty Land Tax “SDLT” on Home Finance Murabaha and Ijara Products

2005 2006

•VAT treatment of Islamic Financial Products (Murabaha, Mudaraba, Musharakah, Wakala and Ijara)

•Finance Act 2006: Extend “SDLT” relief on property finance to all entities, including companies,clubs and LLPs.

•Taxation of Wakala based deposits

Finance Act 2005: Alternative FinanceArrangements:• Profit Share Return “Mudaraba”• Alternative Finance Return “Murabaha”

• Extending “SDLT” exemption to include Musharakah home finance products


Timeline for Islamic finance taxation changes in the UK

2007

•Finance Act 2007 introduced legislation which provided for Sukuk to be taxed similar to conventional bonds.

•Introduced further amendments to the SDLT relief

2008

•The Finance Act 2008, added amendments for Stamp duty and stamp duty reserve tax for Sukuk

•Gave power to Treasury to raise funds using Sukuk

•Introduced anti-avoidance measures on alternative property finance transaction

2009

•The Finance Act 2009 introduced provisions to exempt land which is used for Sukuk purposes from “SDLT”.

•The Statutory Instrument No 2568 2009, extending the definition of financial institution under the alternative finance arrangement to include Insurance Company



• The Statutory Instrument No 814 2010 amended the rules on anti avoidance to ensure that the SDLT relief available for Sukuk “alternative finance investment bonds” (AFIBs) operates as intended.

2010



20132011

• Sch.21 FA 2011 replaced the definition of a ‘Financial Institution’ for SDLT purposes with the definition used in the Income Tax Act 2007

• FA 2013 section 157 and schedule 40 set out the relaxation, for alternate finance structures, from the strict position for imposing the Annual Tax on Enveloped Dwellings and the 15% SDLT rate

• UK is one of the easiest jurisdictions in the World for Islamic Finance

• A strong judicial system based on common law – a precedent based system

• Financial regulations attempt to accommodate Islamic Finance with NO OBSTACLES AND NO SPECIAL FAVOURS

• Legislation does not mention Islamic Finance but Alternative Finance

• Specific regulatory guidance for sharia products ‘ Home Purchase Plan’

• Prudential rules for liquidity PS 4/14 – threatened by lack of understanding in Europe!


Legal & Regulatory Framework

• Student Finance that is sharia compliant

• Help to Buy scheme for home finance

• Start up finance

• Sovereign Sukuk oversubscribed over 11 times

• New announcements WIEF 2014– BofE liquidity facility, Export Guarantees

• Every government department is meant to consider Islamic Finance impact


Political Commitment

“Our commitment to help London lead the way in Islamic finance across the world”

David Cameron, WIEF 2013

UK institution ‘passporting’ to the EU


• Subject to PRA approval, no major obstacle in passporting for branch operations in line with the existing authorisations;

• PRA will remain the main regulator and monitor the Italian operations including liquidity management;

• AML reporting for operations in Italy will be direct to the Italian regulators;

• The product documentation has to conform to the legal requirements set out by the Italian banking regulations;

• Final product documentation needs approvals from Italian regulators;

• Market research validating the demand for Islamic products and 3 year business plan will be required by the local regulators (as part of the PRA passporting file);

• Issue of capital guarantee needs to be understood and resolved in local regulations;

• The concept of “beneficial ownership” would have to be investigated in Italian law for home finance contracts (Is there an equivalent of an English Trust?)


EU Passporting

Islamic Banking’s relevance to non-Muslims in the UK


In a time where there is great disaffection with Bankers it is conduct and values that count

• Embodies social justice

– Returns reinvested in society through risk/reward sharing & prohibiting unethical activities

• In line with today’s societal trends

– Ethical Investing & Corporate Social Responsibility

• Inclusive proposition – open to all faiths

• Responsible finances

– Systematic checks on providers of finance due to the requirement for ethical conduct

• Stability through reinforcing links between financial services & real economy


Islamic Banking is Embedded in ‘Values

“Serving Communities not Markets”

Many Challenges Remain


• Consumer Education and Awareness

– Difficult with Muslim consumers but 7 times harder to reach Non-Muslims

• Islamic Banking ‘in practice’ needs to evolve further to the ‘ideals’

– Proportion of debt based financing (murabaha) compared with equity style financing (murabaha)

• The financial system has inbuilt bias towards debt

– Tax, accounting, regulatory systems making equity financing disadvantageous

• Liquidity management

– Shortage of liquidity instruments reduces returns for Islamic Banks

• Development of frameworks and standardisation

– Standardisation of interbank documentation, frameworks such for benchmarks


Challenges to Islamic Banking

Islamic Islamic Banking is ‘Values’ based. Product innovation must focus on building on these distinctive values


Success Factors

Treating Islamic Finance as an opportunity, not a threat

Creating awareness across the board

Capacity building particularly developing human capital

Developing innovative products that are regulatory and Sharia compliant, market

competitive and commercially viable

Marketing the products with a clear differentiation

Targeting the wider market instead of limiting to Muslims

Positioning the products as an ethical alternative with clear definition of ethical

Investing in Research, Development, Training and ongoing Assurance


www.islamic-bank.com


Documents

Islamic Retail Banking In The UK - TIEF 2014tief2014.org/pdf/report/materiali/choudhury.pdf · 2015. 7. 1. · Retail – banking, savings & home finance 1.16M (76%) IBB target 36%