Why Britain’s Islamic Finance Industry Flopped
By Junaid Bhatti Available at: http://www.respublica.org.uk/blog/2010/06/why-britain%E2%80%99s-islamic-finance-industry-flopped
Full disclosure time: I’ve been involved with Britain’s Islamic finance industry for most of the last decade. Indeed, I was part of the small team that set up the first Shariah-compliant FSA-approved bank in the UK, Islamic Bank of Britain (IBB). As an unashamed enthusiast for the cause, I extolled the virtues of IBB with great vigour for more than four years. After I moved on, I went on to be involved with several other big-name Islamic finance endeavours in the UK and promoted their merits with gusto.
So, as we now approach the sixth anniversary of IBB’s launch, I’m sad to finally have to admit that Islamic finance in the UK has been a huge flop. IBB may still be limping on as probably the last bastion of the cause, but it’s difficult to imagine it holding out for much longer. It’s a dramatic turnaround from those heady summer days of 2004 when we received the news that the government’s regulator, the Financial Services Authority, had agreed to provide us with a banking licence. IBB was the first entirely new UK bank for almost a century! We imagined we’d be overwhelmed by customers and enjoy accelerating growth for years to come. And I can’t begin to describe my pride when I became first official customer of IBB and opened account number X0000001 – an account I still hold today.
Flash forward five years since its inception and IBB has never made a profit. Not once, not ever. Rather, the company has reported combined losses of almost £45 million pounds, and its shares have lost more than 95% of their value since the highs enjoyed during the early years. But at least it’s fared better than many of its contemporaries in the industry. So what about the rest of the UK’s Islamic finance providers?
Well, the UK’s first ‘Halal’ insurance firm, Salaam Insurance, spectacularly shut up shop in 2009 after less than 18 months of trading. Lloyds TSB, which made a half-hearted stab at Shariah-compliant products in 2004, doesn’t seem to have promoted its offering for years. alburaq – owned by Arab Banking Corporation – has effectively withdrawn its savings and mortgage products from the mass market and now serves only the wealthiest of customers. Even HSBC Amanah, probably the most credible and efficient provider of Halal banking in the UK, has dramatically reduced its dedicated Islamic banking staff in Britain, and its marketing volume has been turned way down.
Clearly things haven’t gone well for the UK’s fledgling Islamic finance market since the promise of the early noughties. Before analysing why things went wrong, it’s worth going back to the beginning to examine the landscape before that early flourishing at the start of the new millennium.
Origins of the Industry
The aim of almost every Islamic bank has been to offer Shariah-compliant alternatives to conventional banking services. In practice, this has meant designing products so that, on the surface at least, they look no different to the accounts and loans you get through conventional banks. The customer notices no difference, as the bank does all the hard work to ensure that the contract and its operation are in compliance with the Shariah.
The main aims of Islamic finance are to avoid Riba (usury) and to ensure that money is not utilised to support unethical businesses, such as those involved in booze, pornography and gambling. Businesses that most conventional banks would (and do) whole-heartedly finance if they believe there’s profit to be made. However, whatever the ethical merits of Shariah banking, no-one could argue that Halal banking provides the best customer value from a financial perspective.
Islamic financial principles go back 1400 years, and were implemented by the Prophet Muhammad (pbuh) and his companions in their daily business dealings. Islamic banking, in its modern sense, is only about 50 years old. Unsurprisingly, it was an Arab community that revived these centuries-old financial principles. It all began in 1960s Egypt as a community banking movement designed to encourage rural farming communities to save and earn a Halal income.
However, it’s only been in the last two decades that the Islamic finance industry, buoyed by the increasing value of the Middle-Eastern oil industry, has taken off in a big way. There are now hundreds of Islamic finance companies around the Muslim world, and the industry has demonstrated consistent annual growth of between 15%-20%. So it was only a matter of time before venture capitalists in the West decided to throw their weight behind this potential cash cow.
British Islamic Banking
Few realise that the people driving the establishment of Islamic Bank of Britain and Salaam Insurance were not Muslims. Rather it was European entrepreneurs, attempting to mimic the financial success of Halal finance companies in the Middle East, who got the ball rolling for these flagship Shariah-compliant corporations. The flowering of Britain’s Islamic banking movement had little to do with the Koran and much more to do with capital gains.
In 2004, Islamic Bank of Britain was granted a banking licence and became the first government-authorised Halal bank in the western world. However, it wasn’t the first to introduce Islamic finance to the UK. Since the early 1990s several conventional banks have offered Islamic Mortgages to their British customers, including HSBC’s Amanah, alburaq and Ahli United Bank. These providers are still around, but they haven’t really evolved much since inception, and now limit themselves to offering Islamic Mortgages for only the wealthiest clients.
Over the years UK Islamic finance has offered its customers Savings and Current accounts for individuals, businesses, Masjids and Madrassahs; Islamic “Mortgages”; Commercial Property Finance, Home and Motor “Insurance” and a Halal alternative to conventional loans (dubbed “Personal Finance”). Yet, as the decade closed, barely 60,000 customers had chosen to join the Halal finance movement, representing about 4% of the British Muslim community.
That’s a woeful market share for the industry whatever way you try and spin it – and Britain’s Islamic bankers are desperately trying to spin it at every opportunity. However, it’s clear that all their business plans have failed spectacularly and that the strategies implemented by Islamic finance providers have been faulty from the start.
Where did it all go wrong?
In the mid-noughties, Islamic Finance in the UK seemed to be going from strength to strength. During the last decade the British government authorised the creation of six stand-alone Islamic finance firms. In addition, many conventional banks started offering Islamic products and services. However, public awareness and understanding of the industry and its products remained limited and muddled. Furthermore, right-wing media began encouraging growing animosity towards Halal finance providers, and their products and services, as part of a wider tabloid crusade against all things Islamic.
However, the most significant factor stunting the growth of the industry has been the ineffective way in which Islamic finance has been marketed to the public. (Veterans of the industry can stop reading now, as I’ve been banging on about this for longer than I can remember, and you’re probably tired of hearing it.)
Rational vs. Emotional Consumer
For many years now Halal finance has been sold as the logical choice for the British Muslim. Islamic bankers have explained at great length how its processes and procedures are Shariah-compliant. How an eminent committee of Imams – paid for by the bank – can confirm that it’s Shariah-compliant. And they’ll quote numerous holy texts to support their assertion that banking with them will help you avoid the Devil’s pitchfork after you die.
However, that message has limited appeal because when it comes to finance (and in many other areas of life) human beings make emotional choices as well as – and sometimes instead of – rational ones. The only way that Islamic banking will become successful is if the people marketing Halal finance appeal to the public in a way that is emotionally compelling.
After more than a decade, Islamic finance has attracted a tiny proportion of a potential 1.5 million Muslim adults in the UK. You’d think that, by now, the Islamic finance providers would have realised that boring technical explanations and emotional blackmail may not be the most effective way to win customers.
In fact, it’s the complete opposite of how financial services are marketed by everybody else. If you look at the conventional banking world, the majority of their adverts focus on how their bank offers more convenience and/or better value than their rivals. They usually claim to have the friendliest staff around, and some even go so far as to try and turn themselves into a premium fashion brand – as is the case with Amex Platinum or the NatWest Black.
And it works. It works because customers are driven by their whims, by their emotions and by their vanity. So the question any experienced marketer would ask the Islamic finance industry is this:
“If you were the average customer would you rather join a bank that promises to save your eternal soul thanks to the operational hoops it jumps through so it can conform to Islamic law? Or a bank that promises to be friendly, convenient, good value for money and also offers you a credit card that will make you the envy of your friends and family?”
“But we’re not appealing to the average customer,” they’ll reply, “We’re appealing to Muslims.”
It demonstrates how disconnected the industry’s marketers are from the hearts and minds of their target audience. There exists a myth in the minds of Islamic bankers, and the investors who fund their endeavours, that British Muslims are exceptionally devout and will always choose the ‘Halal’ option if it’s offered to them.
It’s a belief built upon an abundance of solid market research, conducted by independent (i.e. non-Muslim) research firms. The only problem being that the researchers don’t appreciate one important fact. When it comes to questions of religion, most Muslims will lie and pretend to be far more devout than they are in reality. It’s only natural when you are brought up in a community full of people who are judgemental about everyone’s sins but their own. That isn’t likely to come out in the research, however.
Islamic bankers need to ask themselves: if Muslims are as concerned with saving their eternal soul as the research suggests, then why is it that the Mosques are empty for most of the week, for most of the year? The number of people attending the obligatory communal dawn prayer can be counted on one hand (The exception being the month of Ramadan, where everyone suddenly seems to find rediscover their spirituality.) Clearly, most British Muslims are not puritanical and devout. So it hardly makes sense to appeal to a sense of religious devotion that isn’t there.
Islamic banks in the West need to face the reality that Muslim customers are not much different from mainstream customers. It seems counter-intuitive to sell a religious, ethical or moral choice by appealing to people’s ignoble instincts. But it’s a paradigm shift the industry needs to make, and they better make it soon before it’s too late. Because the reality is that the “devout Muslim” segment is nowhere near big enough to support the exceptional operational costs involved in running a bank or insurance firm.
If Islamic Bank of Britain, and the UK Islamic finance industry in general, hopes to survive – and there is some doubt as to whether it can – then it needs to understand the psychology of the customer, which is something that conventional banks have already perfected. Only then will there be hope that our children will still have access to the Islamic finance options we enjoy today.
Junaid Bhatti is Chief Editor of MuslimPolitics.com and a Fellow of the Institute of Islamic Banking and Insurance. He is an activist for the Conservative party and an e-strategist for Westminster Conservatives.