Following the recent news emerging out of Al Rayan Bank, some might be wondering what is going on with the bank. If you’re a customer, should you be worried? We’ve had a bunch of queries from readers so wanted to share our thoughts in this article.
Through our work comparing Islamic mortgages we’ve developed a fairly good network in the Islamic mortgage space. Following discussions with various industry contacts here are some observations in no particular order.
The one-sentence summary of the article is: Al Rayan is going through a strategic change internally but it is financially very stable – though this could mean a reduced availability of Islamic finance products in the UK market in coming months.
What has definitively changed?
According to the reports, Al Rayan has shuttered 2 branches, its chairman recently departed (allegedly due to differences of opinion on the banks’ direction), and it is cutting a few Islamic mortgage products next week.
It is otherwise working perfectly normally and is financially very stable. It is not planning to cull any of its existing customers and service is as normal for them.
Al Rayan is a Bank in transition
Historically, Al Rayan started off as the “Islamic Bank of Britain” with a strong Muslim community focus and looking to offer sharia-compliant mortgages from day one. IBB was listed on the stock exchange and its shareholders included people like you and me.
However, as IBB was not fully capitalised as a bank, it limped along and pretty much always struggled to break even.
It then got taken over by Masraf Al Rayan – a large Qatari Islamic bank. Since then, its shareholders have been the parent company in Qatar. They have pumped a lot of money into Al Rayan and solidified its balance sheet so that they are now profitable.
However, there is a tension. The Qatari owners are mostly not that interested in serving the Muslim community in the UK. They can see that focusing on high net worth individuals, Middle Eastern investors and businessmen, and limiting their current account provision are key strategic steps that can pave the way to a more efficient bank – or at least one that is more in line with what its shareholders want.
However, the UK Muslims in Al Rayan are concerned that if Al Rayan goes down this route it will lose the purpose it started off with in the first place. It will give up a large, profitable market and pull (or reduce) a service that is desperately needed by the Muslim community.
Is my money safe? Is my Islamic mortgage safe?
In a nutshell – yes.
Al Rayan is not going to collapse. There is no financial issue here – this is a strategy, brand and mission issue. The bank is very financially robust and also has its Qatari parent company to fall back on.
It is business as usual, existing customers should expect business as normal.
I myself have products with Al Rayan and have no concerns on that account.
People with Islamic mortgages at the bank need not worry – it is business as usual on that front. However the bank is reducing its lower deposit products which will of course limit future Islamic mortgages available.
So what will be the change?
There are a few different potential scenarios.
Under the first scenario, the Qatari shareholders get what they want. In this scenario Al Rayan becomes a bit like Qatar Islamic Bank and mainly caters of high net worth Middle Easterners. They cut their current account dramatically and potentially pull a large amount their more retail-targeting Islamic mortgage products.
This scenario is bad for the Muslim community.
Under the second scenario, Al Rayan takes a more balanced position, and reduces some of the retail-facing services but continues running current accounts and some forms of Islamic mortgage.
Under the final scenario, Al Rayan carries on as it is.
The second scenario in my view is most likely, given the Financial Conduct Authority will not allow Al Rayan Bank to completely change its entire modus operandi (at the detriment of its main target audience) without extremely careful scrutiny.
However I suspect there will be some reduction in Al Rayan’s service to the Muslim community in the UK – including Muslim charities. This is a shame – particularly on the charity front.
The irony is, from what I understand from my sources, some senior shareholders/personnel are the ones least bothered about serving the UK Muslim community and it is the non-Muslim members – such as the chairman Simon Moore who resigned recently – who are keen to continue serving the original purpose of the bank.
Who fills the gap?
Well there may be no gap to fill in the first place – Al Rayan is only cutting some of its mortgage products. Nothing else is confirmed.
But if Al Rayan does step away from further retail products over time, its a tough one. In the short-term, perhaps Gatehouse Bank. In the long-term, perhaps one of the many Islamic digital banks that are emerging can pick up the slack.
But there are serious challenges to achieving the level of capitalisation and scale needed to make the bank profitable and to deliver Islamic mortgages at scale. This does not happen overnight and also requires a full banking licence – not just an app.
There are actually a bunch of big needs that the UK Muslim community desperately needs – such as Islamic insurance, student finance, shared equity housing plans, a halal equivalent to klarna, a halal equivalent to clearbanc etc. etc. We covered these gaps in more detail here.
But a significant amount of these needs require access to a deep pool of patient liquidity – at least £50m – but much better if over £100m and ideally over £1bn.
Such amounts of money are incredibly hard to pin down and direct into sharia-compliant finance. Many have tried and continue trying – I sincerely hope some succeed. But it’s a hard road with no guarantee of success. It is possible though.
So where does this leave us?
Islamic mortgages are available and will still be available. You can compare them here.
Current accounts with an Islamic bank may be on their way out though – which is a shame. There are a whole range of Islamic digital banks coming online whom you can explore as alternatives – but none of them (as of yet) is a fully-fledged bank. Right now they are all prepayment credit cards. The hope is one of them kicks on and succeeds, or that Gatehouse, BLME, QIB, UBL, Habib Bank AG or some other bank steps up.
But no one is going to give us, the Muslim community, a hand-out. What we need is for someone to succeed at founding and delivering a functioning Islamic bank that gives us products that are above any reproach.
But if we want to change things, we need to invest in our own future. You can do that by investing in early stage Muslim businesses you find yourself and/or you can join our angel syndicate IFG.VC where we share deals we are personally investing in each month with our syndicate. You can also help existing Muslim fintech businesses that exist already by using them. You can find most of them here.
And if you’re of an entrepreneurial bent – you could try to solve it. If that’s you, and you’re serious, with a credible track record in the field, we’d love to hear from you. You should send over your business details here. We’ll help you in any way we can.