Challenging the challengers
This article was first published in IFN Volume 18 Issue 36 dated 8 September 2021.
The world of fintech and technology in general is known for accelerated growth and rapid development. Nevertheless, the last few months have been a perfect storm of news and announcements in the Islamic digital banking sector in the UK. It began in July with launch of Nomo, a fully licenced UK digital bank under the brand of the Bank of London and the Middle East (BLME), an existing fully Shariah compliant bank already operating in the UK. Following swiftly on was the announcement by Alif Bank, an established Central Asian challenger bank licensed in Tajikistan that it will be opening an office in the UK in August. Nomo and Alif Bank now join other Islamic digital banks such as Kestrl, Lintel, Moneemint, Niyah and Rizq in the UK market. This plethora of digital banks puts the UK at the forefront of Islamic digital banking.
The pitch to consumers by a digital or challenger bank is that it seeks to disrupt the established banking system and leverage technology to offer better and improved services to consumers and offer a solution to the underbanked who cannot access traditional banking services. If we consider the established banks to be the gatekeepers of the conventional banking system, then they have already been challenged. Thus, the established banking system in the UK has already been disrupted and challenged at the start of the millennium by the entry of the Islamic Banks such as for example Al Rayan and BLME.
It would not be fair to do a straightforward comparison between the established Islamic Banks and the Islamic digital banks, given that the two groups would have different growth strategies, target users, and existing client base. The one exception to that in my opinion would be Nomo, since it operates under the brand of BLME and there will inevitably be individuals who will bank with both.
The focus of most of the UK Islamic banks has been predominantly on providing banking facilities for investment in particular into real estate assets. Less focus has been placed on operating a full retail offering to individual consumers in the UK with the exception of Al Rayan. Therefore, there is a gap in the retail consumer market, which the Islamic digital banks could exploit by providing a shariah compliant equivalent to a Revolut or Monzo. The Muslim population in the UK is quite a young demographic, a trend which is reflected across western Europe. It is commonly the younger demographic who would have most familiarity with using apps to manage all aspects of their day to day lives, including access to financial services.
Environmental and social governance (ESG) and sustainability benchmarks are one of the criteria that consumers and investors use to measure financial services. The 'ethical' and 'share risk' aspects of Islamic Finance could therefore help Islamic digital banks when they come to grow their customer base, especially with access to shariah compliant ESG investments offered through an app or a bricks and mortar institution.