The First Assay: Islamic Bank of Britain

‘In August 2004, the FSA authorised the Islamic Bank of Britain (IBB), the first wholly Islamic retail bank in a country where most of the population is non-Muslim. Inevitably, the process raised new questions and it took some 18-24 months to complete. The FSA was then able to carry over the lessons to later applications.

The main issue that arose concerned the definition of a ‘deposit’. In the United Kingdom, a deposit is defined as a ‘sum of money paid on terms under which it will be repaid either on demand or in circumstances agreed by parties.’ 29 the point is important because deposit-takers are regulated and the customer is assured of full repayment as long as the bank remains solvent. A Savings account originally proposed by IBB as a ‘deposit’ was a profit-and-loss sharing account, or Mudharaba, where Sharia law requires the customer to accept the risk of loss of original capital. This was not consistent with the FSA’s interpretation of the legal definition of a ‘deposit’ which requires capital certainty.

After extensive discussions, the solution IBB adopted was to say that, legally, its depositors are entitled to full repayment, thus ensuring compliance with FSA requirements. However, customers had the right to turn down deposit protection after the event on religious grounds, and choose instead to be repaid under the Sharia-compliant risk sharing and loss bearing formula. The solution for IBB may, however, not necessarily be appropriate in other contexts. The FSA is prepared to review each case on its merit and will try to reach solutions that are acceptance to all those involved.

Another area which was new to the FSA was the role of the Sharia Board, which we have already discussed above. Financial promotions are particularly important as the IBB was, and is, marketing its products directly to retail customers. The FSA and the IBB looked at how the risks associated with its products were to be presented to customers. This was presented no problems so far. The FSA is currently taking a similar approach to the first Takaful firm which has recently applied for authorisation.

The IBB now offers a range of retail and business banking services,. It has established eight branches in cities with large Muslim populations, around the country. According to recent figures, the bank had over 50,000 accounts and some 42,000 customers.’


Addendum: in 2014 a Qatari bank Masraf al-Rayan acquired IBB, changing its name to Al Rayan Bank.


Source: FSA (Financial Services Authority — by Michael Ainley, Ali Mashayekhi, Robert Hicks, Arshadur Rahman and Ali Ravalia), ‘Islamic Finance in the UK: Regulation and Challenges’ (November 2007), page 14-15

(Two footnotes and an explanation of mudaraba — in the FSA quote — omitted from the quotation)