This report was published on : Datencule on 3rd-June-2024.

Contents

1. Introduction
2. Data Observations
3. Summary of Key Decisions
4. Analysis
5. Conclusion
6. References

Introduction

The UK's first fully licensed Islamic bank was the Islamic Bank of Britain, which changed its name to Al Rayan after being acquired by Masraf Al Rayan of Qatar in 2004 (1). It stands out as the first Islamic bank in the UK to achieve a public rating. The word sharia means law or set of laws and the bank operates under the rules set by Islam for financing activities.

In Islam, interest payments, known as riba, are strictly prohibited. Additionally, investments in "sin stocks"—companies that generate profits from gambling, alcohol, firearms, and tobacco—are not permissible. Islamic finance also forbids profiting from debt, emphasizing that all investments must be backed by tangible assets. As a result, Sukuk, or sharia-compliant financial certificates, were developed. These instruments resemble bonds but grant investors a share of ownership in the underlying asset, ensuring compliance with Islamic principles (4).

Data Observations

The data was collected for sex key financial metrics to assess the organization’s financial health and provide a brief insight into the organization's financial standing.

Customer Deposits

Customer deposits have shown remarkable growth over the past five years, with £2.04 billion recorded in 2022 compared to £1.54 billion in 2018. This upward trend signals a strong attraction to the bank's products within the consumer base

Total Equity

In 2018, the total equity was £134,966 million. By 2019, it increased to £145,821 million. Continuing the trend, it rose to £150,056 million in 2020. In 2021, there was another increase, bringing the total equity to £157,311 million, and, in 2022, the total equity reached £167,315 million.

Overall, the trend indicates a steady growth in total equity over the years, suggesting positive financial performance and potentially indicating a healthy and expanding business.

Total Income

The total income shows a general upward trend over the years, starting from £38,619 million in 2018 and reaching £55,807 million in 2022.

A noteworthy observation is the substantial income increase from 2021 to 2022, with earnings surging from £44,396 million to £55,807 million. This significant growth reflects the organization's remarkable progress and success.

Profit Trends

There is a noticeable decrease in profit from 2018 (£6,430 million) to 2020 (£3,838 million), indicating a significant decline in profitability during that period. The decline in 2020 is attributed to Covid-19 but the profit in 2019 also reflects little growth and this could be because the organization has invested in recruitment, risk management, and infrastructure (Annual Statement 2019).

However, there is a substantial recovery and growth in profits from 2020 to 2021, with profits increasing from £3,838 million to £9,003 million. The trend continues with a remarkable increase in profits from 2021 to 2022, reaching £16,500 million.

Total Assets and Liabilities

The company’s assets grew from 2018 to 2022 with a slight decrease in 2021.

The total liabilities keep on increasing year by year as shown below:

Summary Of Key Decisions

• Al-Rayan's parent company, Masraf Al Rayan Commercial Bank, completed its merger with Al Khaliji Commercial Bank in 2021. This merger has created one of the largest Sharia-compliant banks in the Middle East. Al Rayan Bank intends to pursue to take advantage of the more prospects that result from the merger. However, the Bank's parent business, MAR, is a well-known and successful sponsor that has assisted the Bank in building a compelling proposition for high-net-worth people and attracting clients from the GCC (Annual Statement 2021).
• The main cause of the income rise in 2019 was the annualization of the asset growth in 2018, which produced a return for the entire year ( Annual Statement 2019).The Bank's total deposits rose even though financing assets remained unchanged. This came after the Bank's 1.6% EPR Everyday Saver product launch and its 1% EPR Everyday Saver ( Annual Statement 2019).
• The year 2020 saw a significant decline in the bank’s performance due to Covid-19 and to stimulate the economy in reaction to the downturn, the Bank of England has also lowered its base rate. The Bank's profitability has also been hurt by the decline ( Annual Statement 2019).
• The Bank achieved a significant increase in profits in 2021, primarily as a result of its capacity to maintain its financing asset income from higher volumes of Commercial Property Finance (CPF) and its achievement of competitively low funding costs. The bank modified its retail banking products to lower risk (Annual Statement 2021). The bank increased its volume of activity throughout the year, particularly in CPF (Commercial Property Finance) deals. This increased activity contributed to the stability of financing income (Annual Statement 2021).
• To broaden its source of funding, the Bank issued the Tolkien Sukuk in 2018. Although the Bank has benefited greatly from the issuance of Sukuk, as it has been a low-cost source of funding, the Bank decided to call the sukuk and fully redeem it in April 2021 due to changes in market rates following the Covid-19 epidemic. The Bank's cash outflows for the Tolkien Sukuk repayment in April 2021 caused its total assets to drop from £2.34 billion to £2.26 billion, although its Retail Financing and Premier Financing divisions have stayed largely stable (Annual Statement 2021).
• In the Bank's new strategy, which was launched in February 2022, The aim is to continue the transformation of the Bank into a financial institution that is focused on premier banking and property finance, mainly for residential financing, and produces a viable, resilient, Sharia compliant business(Annual Statement 2021). According to the Bank's strategy, record drawdowns in commercial real estate contributed to an excellent profit increase in 2022, demonstrating the growing demand for residential investment finance that complies with Sharia. The strategy also resulted in lower and more competitive funding costs ( Annual Statement 2022).
• Despite losing some of its real estate product offers to new customers, more than 16000 new retail saving accounts were opened in 2022 (Annual Statement 2022).

Analysis

The UK Islamic Finance Market is expected to reach USD 8.74 billion by 2029, growing at a compound annual growth rate (CAGR) of 3.12% from its estimated USD 7.5 billion in 2024 (3). However, according to 2019 data from the UK's Gatehouse Bank, Muslims make up 5% of the population, and nearly half have never utilized Islamic financing offerings, hence there is little demand for Islamic products in the country. Limited public knowledge, sensitivity to sharia, trust in the product’s adherence to sharia, a narrow distribution network, and a smaller selection of products than traditional banks all pose challenges to demand. Islamic financing products are typically more expensive than conventional ones in nations where Islamic banking is still in its infancy, which further reduces demand (4).

However, The demand for Islamic finance solutions, especially those for property purchases, is rising across Europe. For certain people, interest-only mortgages are not the best option. Interestingly, non-Muslims are also interested in this. Islamic Fintech can also be very helpful in providing financial services to people who have historically had trouble accessing them, like small and medium-sized businesses and migrant workers (5).

The competition in the UK is also intensifying with the rise of Islamic fintech companies. Fin techs such as Nomo, Kestrl, and Score Mastercard by DND are prime examples of the growing Islamic Fintechs. These companies are leveraging technology to offer innovative, sharia-compliant financial services, catering to the increasing demand for ethical and inclusive banking solutions.

The bank should diversify its offerings beyond property finance to attract a broader customer base, including both Muslims and non-Muslims. This strategic expansion can help the bank grow its market share and appeal to a wider audience. Additionally, maintaining a strong reputation is crucial, especially given the recent £4,023,600 fine imposed by the FCA for inadequate anti-money laundering (AML) controls (6), The bank has to take adequate measures to avoid such issues in the future. Such lapses undermine customer trust and can be detrimental to the bank's future, particularly in an increasingly competitive and concentrated market. Addressing these issues promptly and effectively will be essential for the bank's long-term success and stability.

Conclusion

Technology is shaping the Financial sector and the banks must provide bespoke and personalized solutions that cater to individual needs and priorities. Leveraging open banking, artificial intelligence (AI), and data analytics will be key to achieving this goal, enabling the creation of tailored financial products and services that enhance customer satisfaction and loyalty (7).

Financial data indicates that Al Rayan Bank’s performance has improved since 2018. However, sustained growth will require continuous enhancement of product offerings based on thorough market research, as well as ongoing improvements in infrastructure and risk management. This commitment to innovation and robustness is essential to maintaining and accelerating the bank's positive trajectory.

References

All the financial data has been sourced from Al Rayan Bank Annual Statements 2018,2019,2020,2021, and 2022.

1. https://www.thebanker.com/Islamic-banks-struggle-to-gain-ground-in-the-UK-1666597404
2. https://impact.economist.com/perspectives/sites/default/files/eiu-diedc_article_2_26th_april_2020_0.pdf
3. https://www.mordorintelligence.com/industry-reports/uk-islamic-finance-market
4. https://www.fitchratings.com/research/islamic-finance/uk-maintains-islamic-finance-western-hub-status-despite-domestic-niche-20-06-2023
5. https://www.qfc.qa/-/media/project/qfc/qfcwebsite/documentfiles/research/global-islamic-fintech-report.pdf
6. https://www.fca.org.uk/news/press-releases/fca-penalises-al-rayan-bank-plc-anti-money-laundering-failures#:~:text=FCA%20penalises%20Al%20Rayan%20Bank%20PLC%20for%20anti%2Dmoney%20laundering%20failures,-Press%20Releases%20First&text=We%20have%20fined%20Al%20Rayan,money%20laundering%20(AML)%20controls.
7. https://www.ey.com/en_uk/banking-capital-markets/how-uk-banks-can-meet-customer-needs-in-the-future