Islamic banking is big business internationally, yet it has struggled to get off the ground in the UK. Indeed, institutions offer Islamic banking activities in more than 75 countries and have some $500bn to $1 trillion (£250bn to £0.5 trillion) worth of assets under management. So why is the industry yet to take off here, and how can bold investors play this fledgling market?
The UK government’s recent announcement that it is looking into the possibility of issuing a sovereign sukuk (a kind of Shariah-compliant bond) reaffirmed its commitment to the Islamic finance market, and could help rekindle interest in the UK's fledgling Islamic banking sector. Only two Islamic finance companies have UK quotations, and neither of them has proved a very attractive investment so far.
The first Western Shariah-compliant commercial bank, the Islamic Bank of Britain (IBB), received approvals to carry out Shariah-compliant conventional banking activities - such as savings, current accounts and mortgages - from the Financial Services Authority (FSA) in August 2004. The bank floated in October 2004 at 25p a share, but now trades at half that price having hit a high of 13.7p and a low of 4.75p in the last year.
The bank’s financial performance since listing has been mediocre at best. It reported a loss of £6.4m in 2005, then £8.8m in 2006, which narrowed to £6.9m in its latest results for the year ended 2007. But away from the profit and loss account there have been some positive developments. Deposits increased 61 per cent to £135m last year, customer numbers went up 38 per cent to 42,000 and account numbers swelled 27 per cent to 64,000. And with the FSA estimating Britain’s Muslim population at about 1.8m, IBB’s customer base represents just 2.3 per cent of its main target market, so there is definitely room for growth. The bank has also embraced online and telephone banking, which brings it one step closer to placing itself on a level playing field with conventional high street banks.
Britain's second Islamic bank, the European Islamic Investment Bank (EIIB), received approvals to operate investment banking activities in March 2006. The bank floated on Aim last May, raising a disappointing £75m - it was looking to raise at least £100m - with shares priced at 25p each. The shares now trade at 7p. Over the last 12 months, they have reached a high of 10.25p and a low of 5.1p.
The bank's 2007 results saw it produce a pre-tax loss of £2.5m against 2006’s £1.9m pre-tax profit. The bad showing was attributed to the unsuccessful launch of a Shariah-compliant pan-European property fund. In hindsight, the attempted launch was probably not the best idea given the signs of an impending downturn in the commercial property market. The fund saw poor take up and was withdrawn with the property portfolio hauled onto EIIB’s own balance sheet. Without the fund, the bank would have made pre-tax profits of £4.8m.
Investors’ confidence dipped further upon January's announcement that EIIB's director and deputy chairman Khalid A. Al Bassam, and chief operating officer and finance director Atif Raza will step down later this year. Replacements have not been announced. But more importantly, the bank has yet to secure key European deals.
But the poor showings from these banks doesn't mean the market is not there. A third Islamic bank, the Bank of London and the Middle East (BLME), opened its doors last July and has since reported a pre-tax profit of £330,000 from revenues of £10.3m. The bank, which is owned by Kuwaiti-based Boubyan bank, says its pipeline of new business is strong. But unlisted BLME remains in the hands of financial institutions and pension funds and a flotation looks unlikely.
Junaid Abbas Bhatti, director of Islamic finance consultancy Ballencrieff House, blames the poor performance of EIIB and IBB's shares on the lack of information available to the banking public. "I believe that UK's Islamic finance players can do a lot more to get their message heard," he says. "Once the UK Islamic banks start promoting their products and services in direct competition with conventional providers, there will be greater interest from the stock market too."
And he may just be right. The high growth in IBB's customer base and account openings could mean that the sector is finally ready to flourish. But it's up to IBB to keep that momentum and for EIIB to find it, but with so few players in the market it could prove hard to get the message across.