Islamic Finance and the Digital Generation

Our last finance review covered the most well known name when it comes to UK Islamic Banking, Al Rayan. One of the critiques however was at their online capabilities especially when comparing to the new digital banks such as Monzo and Starling.

There are quite a few names for these new offerings such as ‘challenger banks‘ or ‘fintechs‘ but for us we’ll settle on neo banks – because, it just sounds better.

What is it about these neo banks that have caused people to flock to them? More importantly, are there any options out there that covers both Islamic finance and digital banking?

The short answer is yes!

Looking at the wider picture, criticism shouldn’t be focused on Al Rayan. The majority of the traditional high street banks have no meaningful comparison to them and in some instance have tried to replicate them but failed.

The lack of personalization really holds them back when comparing to the modern neo banks. Products such as Monzo have proven extremely popular with the generation that is always online. Their ease, flexibility and convenience are all literally at the touch of a button.

When it comes to banking we can’t always guarantee our money is stored in ways that conforms to Islamic principles.

Recently a (virtual) round table chat brought together some of the brightest minds in Islamic banking where they discussed genuine new products similar to Monzo and Starling – and all within Islamic finance principles.

This is a summary of the discussion that included Ibrahim Khan (co-founder of Islamic Finance Guru) who chaired the call, Ali Abdulkadir Ali (founder of Niyah), Areeb Siddiqui (founder of Kestrl) and Akmal Saleen (co-founder of Rizq).   

Why Have Islamic Neo Banks?

To begin with we have to admit these neo banks are all new to us. In fact we misspelt Kestrl which resulted in a website about birds. Finally arriving on the right website, we saw that Kestrl is named after the Kesterl bird and is also their logo. You learn something every day!

The creation of digital Islamic banks isn’t necessarily about trying to take over the market but rather the same way most great ideas are generated – to solve a personal problem. All three of the interviewees had previously worked in Islamic finance, fintech and marketing, and all shared a similar problem – the lack of products made specifically for Muslims. 

Ali immediately pointed out how in his home country of Somalia not everyone had access to physical bank accounts yet they were able to transfer money easily through apps. Whilst this was great for the local people the product did not specifically cater to Islamic finance principles e.g. they were based on Riba.

Currently no institution exists out there that talks to the lifestyle of a young Muslim living in the west. This lack of communication and integration into the modern Muslim exists both in conventional financial institutions and the incumbent Islamic financial institutions.

What Muslims Want From Islamic Neo Banks

Areeb spoke about a 2019 nationwide survey on why current offerings were not used by the general public in a greater quantity. This was done via surveys and face to face interviews and the results were surprising.

Originally the lack of Muslims using Islamic banking products was believed to be due to lack of trust, higher fees or poor convenience. However over 70% said it was due to a lack of awareness of what solutions were out there.

Whilst everyone has generally heard of Al Rayan nobody really used them unless they had a branch in the same area. Even more recent Islamic finance offerings such as Wahed and Yielders weren’t being used by many people outside of London due to the lack of awareness.

Another insight was that Muslims don’t like to be marketed with regards to their finances based on their religion. It isn’t enough to say “we are Muslim, you are Muslim – so you should bank with us”. People are very skeptical when it comes to this type of marketing perhaps from previous experiences with Islamic banks or institutions.

It isn’t enough to say “we are Muslim, you are Muslim – so you should bank with us”

People want to be seen as individuals with problems and they want companies to help solve them. A great examples used was My 10 nights (which we referenced in a previous article). This start-up solved a specific problem around Ramadan. They did so in a way that solved a personal problem for the Muslim community whilst not focusing on the aspect of “use us because we’re Muslim and so are you”.

Two newer insights into what Muslims want are around firstly young Muslims wanting more information about the ethical side of the Bank. They want to know how they are helping the community and solving local issues. Ethical banking is one of the main components of Islamic finance and so should always be taken into account when making decisions.

Secondly, Muslims don’t want to spend an eternity searching for options. On average it takes Muslims three times as long to find something acceptable for them compared to a non-Muslim. A great example is searching for a mortgage which can result in plenty of results however trying to seek out an Islamic mortgage will only give you 3 results in the UK.

When you eventually look into these options you find they are not digitalized, need face to face appointments and require several paper applications to be filled out.

Why Can’t Muslims Just Use Modern Neo Banks or Ethical Banks?

An important topic discussed was the fact there are plenty of neo banks out there that have the ease, flexibility and convenience and also don’t pay interest. Why can’t you just use a Monzo or Starling or a bank that prides itself on ethical investing?

The reason is due to the fact they don’t cater to a Muslim lifestyle. Whilst you won’t be earning riba as they don’t pay interest – there isn’t always clarity on how they use your money.
Questions that should always be asked:
Where do they invest your money?
How do they fund themselves?
Do their ethics comply with Islamic ethics?

The interviewees were also quite open at questioning how can we trust Islamic Banks. Neo banks are naturally less hierarchical and bureaucratic than traditional banks. In fact TML managed to get in touch with the founder of Kestrl, Areeb Siddiqui who was more than happy to explain the bank’s offerings and services in addition to their tentative release dates.

Areeb explained that for Kestrl all money will be stored in a non-interest-bearing account held in the Bank of England. This model ensures that not only is it secured safely but also cannot be accessed by anyone else apart from you.

The deposits are ring fenced from anyone including the banks from being used for anything. This way you are certain your money cannot be used for non-Islamic purposes.  

The Development of Islamic Neo Banks

Everyone agreed that for people to sign up, their marketing has to go beyond just showing they’re Muslim. Their business model has to cater to the needs of Muslims and provide a really well tailored product.

Looking at hard numbers the potential customer base isn’t very large. Muslims make a small proportion of the UK population and therefore their growth will always in effect have a limit.

This is why having founders such as on this round table who believe in this concept even though there is a potential limit for expansion is so important.

They do not want Muslims to be left behind in their finances just because current offerings do not align with their values. Akmal stated that just because the market isn’t big enough to make large profits is not a reason to not offer these products.

He believes people should have access to these tools and technologies. In fact he went as far as to say “it is a responsibility to bring these products to people to let them access these tools and technologies”.

“It is a responsibility to bring these products to people to let them access these tools and technologies”.

In wanting to help people it is imperative they take on board the feedback from the survey results discussed earlier. Lessons have also been learnt from failed neo banks such as N26 in the UK or Insha bank in Germany. The former fell foul of the uncertainty over Brexit whilst the latter misunderstood the needs of the Turkish Muslim community in Germany.

Specific products the group are working on reflect the current covid-19 crises. For instance they understand that Muslims as a demographic have been disproportionately affected by Covid-19. Many Muslims are frontline workers, self employed, furloughed or unfortunately lost their jobs. Suddenly budgeting has become extremely important and so a high focus is being made on developing features around this.

When launching something new it always is about those first 3-5 years. Staying dynamic and keeping up with what the customers are really looking for is crucial. The group are so adamant on providing the best product for Muslims that they even said they hoped more companies bring out products. This will not only solve more problems for Muslims but also push them to better themselves to retain customers.

Offerings of Islamic Neo Banks

Whilst not all banks are fully open to the public yet, below are some of the exciting features to be offered. Note the below is not the complete list of each products’ offerings but just a snapshot of some interesting ones. TML will do reviews on each once the product is fully available to the public.

Everybody involved is well aware that entering this market is all about the unknown. What was clear from the round table was they’ve learnt from previous mistakes companies have made and taken on board customer feedback from their surveys. With this in mind, Islamic finance and digital banking is entering into an exciting phase for Muslims.