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Islamic Retail Banking

In The UK
Sultan Choudhury
CEO
Islamic Bank of Britain (IBB)
18 November 2014
Turin Islamic Economic Forum

Banking you can believe in


Overview of IBB

Banking you can believe in


Islamic Bank of Britain

Est. 2004

1st
wholly
Sharia 58k > 643m > 521m 30
products
compliant
retail
bank

Banking you can believe in


An Introduction to IBB

UKs First wholly Sharia compliant retail bank Head office in Birmingham

Founded in 2004 Over 50,000 customers


Background
Over 30 products High brand awareness levels

Authorised & regulated by FCA & PRA

Staff of 120 Part of MAR Member of FSCS

Sharia compliant
Oversight via SSC & SCO Asset based & backed Pioneering

Operates without interest Our values


Islamic Secure
Finance Good value
Different
Community orientated
Based on trade, entrepreneurship & risk-sharing
Banking you can Believe in
Never invest in prohibited areas

Muslim & non-Muslim Ethical alternative to conventional

Banking you can believe in


An Introduction to IBB

70% of Muslim non-users would consider 1.53M adult UK Muslims


UK Muslim
Rapidly growing (3% to 5% in 10 years) market 1.16M (76%) IBB target

Young, have children, employed, less affluent than average 36% of Muslims use Islamic finance

Retail banking, savings & home finance


Deposits up 50%
Business banking and property finance
Wide product Online acquisition (14%+)
range GCC property finance
Sustained
Financing up 72%
growth
HNW wealth mgmt & premier banking

Total assets 521m

6 branches & agencies


Integrated, multi channel Outstanding
customer Telephone & online banking
Strong customer loyalty service UK based, multi-lingual call centre

Banking you can believe in


Distribution Channels

Branch/Agency

IBB distribution
channels

Contact Centre Intermediary

Self Service

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IBB Key milestones

Since being granted a Banking licence, IBB has been busy building its proposition

2004 2005 2006 2007 2008


IBB is the first
Online banking is
standalone Sharia A further four IBB launches an
compliant Bank to branches are opened Est.
launched, expanding 2004
Internet savings
IBB launches the
reach beyond the Home Purchase Plan
receive an FSA across the UK account
branch network
Licence
IBB launches further IBB launches
products including a additional savings
IBB launches its
The first branch is Current Account and products including the
opened in London >50k
unsecured finance for
Young Persons
Savings
> 330m > 250m 3060 Day Notice
personal and business products
Account and Wakala
customers Treasury Account
Following the credit
The Bank launches its crunch, the Islamic
IBB launches its first Telephone and postal first ever commercial model of banking
savings account banking are launched property finance proves more resilient
product than the conventional
banking model

Banking you can believe in


IBB Key Milestones

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

2009 2010 2011 2012 2013 2014

Masraf Al Rayan IBB announces


IBB adds Wealth The UKs first
IBB launches its The Buy to Let (MAR) announces that Masraf Al
Management Sharia compliant
Premier Banking
Services to its
Purchase Plan is Est. 2004
its intention to
ISA is launched by
Rayan has
Service launched purchase majority become the new
proposition IBB
shareholding parent company

Home Purchase IBB works with the


Plan Premier UK Government to
IBB launches the
HPP is launched aimed at GCC provide a HPP
in Scotland >50k
clients is added to
120 Day Notice
> 330m
Account
> 250m 30
backed by the
the Premier products
Help to Buy
proposition Guarantee

IBBs table topping


IBB launches its FTD proves to be
Fixed Term popular. The
Deposit Savings majority of new
Accounts customers are
non-Muslim

Banking you can believe in


Programme of online marketing improvements

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

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Programme of online marketing improvements

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Rebrand to Al Rayan Bank

UK Retail GCC & Commercial

Current

New
Use starts December 2014

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What will change and what wont?

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
Pioneering Dedicated Aspirational Dependable
compliant

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Changes combined in practice

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Islamic Banking
Underpinnings

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Islamic Finance

Video 1

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Basic Principles

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.)

These principles are derived from the Sharia

Banking you can believe in


In Practice

Video 2

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Experians segmentation model 14 Groups then
split into 50 Types

Lump sum
investments &
Regular savings F Accumulated Wealth savings
& childrens
savings
G Consolidating L Platinum
D Growing Rewards J
Assets Pensions
Established
Reserves
E Family Interest
H Balancing
M Sunset Security
Budgets
A Bright Futures
K Seasoned
B Single Endeavours
I Stretched Economy
N Traditional Thrift
Finances
C Young Essentials

Recognised
Savings
First time Market
home buyers Main mortgage Recognised
market Mortgage
Market

Banking you can believe in


IBBs Opportunity

IBB currently There are


has 15,800 637,400 UK
customers who adult Muslims
fall into one of who fall into one
the 30 priority of the 30 priority
Types segments
= 34.1% of the = 41.7% of the
IBB base Muslim market

Banking you can believe in


Key Demographic Facts

1.53M UK adult 763.7K UK Muslim IBB customers =


Market size Muslims = 3.12% of households = 3.01% 3.32% of UK adult
UK adult population of UK households Muslims

Origin Pakistan = Bangladesh = Turkey = Lebanon = Morocco =


42.1% 10.5% 8.3% 7.9% 3.2%

Age, gender Young vs. UK More male vs. UK More children vs. UK
& children 72.4% aged 18 to 45 58.1% vs. 48.3% 52.6% have family
vs. 51.5% under 18 vs. 28.1%

Less affluent vs. UK 30.1% More employed vs. UK 59.1%


Income earn under 10k vs. 27.7% employed full time vs. 50.3%
1.0% earn over 100k vs. 1.3%

Fewer shares vs.UK Lower value of savings & investments vs. UK


Investments
8.7% vs. 16.8% 24.2K vs. 38.2K

More renting & Council housing More terraced housing & flats
Property
vs. UK 40.5% vs. 32.1% vs. UK 64.3% vs. 44.8%

Banking you can believe in


The Top 5 Savings Products for Muslims

1 Childs savings account

2 Regular savings account

3 Property investment Buy to Let

4 Cash ISA

5 Instant access savings account

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Muslim Distribution across the UK

62% of all UK adult Muslims are concentrated


in 20 postal areas running from London,
through the Midlands, to the North

Banking you can believe in


Top 20 postal areas by volume of Muslim Population

Rank Penetration
(Muslim 18 + Postal Postal Area Muslims Adults into area 12 of the top 20 postal areas are
Population) Area Description Count 18 + (%) in the South, representing
Midlands 1 B Birmingham 137,139 1,414,030 9.70 522,800 adult Muslims (55% of the
South 2 E London E 127,774 651,547 19.61
population of the top 20 areas)
North 3 BD Bradford 71,055 429,445 16.55
South 4 N London N 62,385 605,115 10.31
North 5 M Manchester 52,645 890,465 5.91
South 6 IG Ilford 44,675 232,704 19.20
South 2 of the top 20 postal areas are in
7 NW London NW 43,206 437,309 9.88
North 8 OL Oldham 39,406 343,855 11.46 the Midlands, representing
North 9 BB Blackburn 38,982 370,783 10.51 170,900 adult Muslims (18% of the
South 10 SW London SW 36,785 717,410 5.13 population of the top 20 areas)
South 11 HA Harrow 34,737 337,262 10.30
South 12 SE London SE 33,822 743,209 4.55
Midlands 13 LE Leicester 33,815 760,210 4.45
South 14 W London W 33,301 443,497 7.51 6 of the top 20 postal areas are in
South 15 UB Southall 31,427 255,983 12.28
North
the North, representing 254,400
16 S Sheffield 27,593 1,071,499 2.58
South
adult Muslims (27% of the
17 LU Luton 25,320 251,169 10.08
North 18 WF Wakefield 24,771 390,966 6.34 population of the top 20 areas)
South 19 SL Slough 24,749 272,467 9.08
South 20 TW Twickenham 24,622 360,656 6.83

Banking you can believe in


IBB Survey of Customer Attitudes

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 IBBs 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 dont currently use Sharia compliant finance, are likely to consider
doing so in the future.

Banking you can believe in


Overview of the UK market & summary of IBBs
targeting strategy 2 key audience groups

Too large an
49M adults in the UK audience for IBB
Average non-Muslim is 7 times less likely to to market to all
purchase Islamic finance than average Muslim
(Research for IBB by 2Europe, 2013)

1.53M adult Muslims Limited levels of non-Muslim interest


9% exclusively use Islamic 62% of non-Muslim prospects say they are
finance; 27% use some unlikely to use Islamic finance in the
Islamic finance; 45% will future
consider Islamic finance But when they do buy, they are loyal

N.B. Some very anti-Islamic


(finance) sentiment
Target Group 1 - Some from Muslims not Target Group 2
Muslims believing or Interested non-Muslims
Use face to face sales misunderstanding Use PR and Pay Per Click
and direct marketing to Some from non-Muslims, advertising to allow those
target best prospects generally anti-Islamic interested to self select

Banking you can believe in


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

22M

4M

Banking you can believe in


Strong Growth in last 2 years

Real Estate Assets Deposits


500,000,000 500,000,000

450,000,000 450,000,000

400,000,000 400,000,000

350,000,000 350,000,000

300,000,000 300,000,000

250,000,000 250,000,000

200,000,000 200,000,000

150,000,000 150,000,000

100,000,000 100,000,000

50,000,000 50,000,000

- -

Banking you can believe in


Drivers of contemporary
Islamic Banking?

Banking you can believe in


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

Banking you can believe in


Factors Driving Islamic Banking

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)

Banking you can believe in


UK Factors

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 UKs 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

Banking you can believe in


Taxation Regime

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

Banking you can believe in


Timeline for Islamic finance taxation changes in the
UK

2003 2005 2006

Finance Act 2003: Finance Act 2005: VAT treatment of Islamic


Relief from double Alternative Finance Financial Products
Stamp Duty Land Arrangements: (Murabaha, Mudaraba,
Tax SDLT on Home Profit Share Return Musharakah, Wakala and
Finance Murabaha Mudaraba Ijara)
and Ijara Products Alternative Finance
Return Murabaha Finance Act 2006: Extend
SDLT relief on property
Extending SDLT finance to all entities,
exemption to include including companies,
Musharakah home clubs and LLPs.
finance products Taxation of Wakala based
deposits

Banking you can believe in


Timeline for Islamic finance taxation changes in the
UK

2007 2008 2009

Finance Act 2007 The Finance Act 2008, The Finance Act 2009
introduced legislation added amendments for introduced provisions to
which provided for Stamp duty and stamp exempt land which is
Sukuk to be taxed duty reserve tax for Sukuk used for Sukuk purposes
similar to from SDLT.
Gave power to Treasury
conventional bonds.
to raise funds using The Statutory Instrument
Introduced further Sukuk No 2568 2009, extending
amendments to the the definition of financial
Introduced anti-avoidance
SDLT relief institution under the
measures on alternative
alternative finance
property finance
arrangement to include
transaction
Insurance Company

Banking you can believe in


Timeline for Islamic finance taxation changes in the
UK

2010 2011 2013

The Statutory Sch.21 FA 2011 FA 2013 section 157


Instrument No 814 replaced the and schedule 40 set
2010 amended the definition of a out the relaxation,
rules on anti Financial Institution for alternate finance
avoidance to ensure for SDLT purposes structures, from the
that the SDLT relief with the definition strict position for
available for Sukuk used in the Income imposing the Annual
alternative finance Tax Act 2007 Tax on Enveloped
investment bonds Dwellings and the
(AFIBs) operates as 15% SDLT rate
intended.

Banking you can believe in


Legal & Regulatory Framework

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!

Banking you can believe in


Political Commitment

Our commitment to help London lead the way in Islamic finance across the world
David Cameron, WIEF 2013

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

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UK institution
passporting to the EU

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EU Passporting

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?)

Banking you can believe in


Islamic Bankings
relevance to non-
Muslims in the UK

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Islamic Banking is Embedded in Values
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 todays 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
Serving Communities not Markets

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Many Challenges Remain

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Challenges to Islamic Banking

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

Islamic Islamic Banking is Values based. Product innovation must focus on


building on these distinctive values

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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

Banking you can believe in


Banking you can believe in

www.islamic-bank.com

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