Islamic Bank warns of cutbacks

THE Islamic Bank of Britain has warned it may have to cut back on growth plans if it does not raise the capital needed to develop its strategy.

The Birmingham-based bank, which has announced annual losses of £9.5m, said it was in talks about raising additional funds but if these failed to materialise then the cutbacks may have to be implemented.

Mohsen Moustafa, chairman, said in the bank’s annual results statement: “The bank raised new capital of £7.5m via a placing of new shares in January 2009.

“While the bank continues to have sufficient capital for its current requirements, the board is in ongoing discussions with its advisors and interested parties regarding the raising of additional capital to support planned future growth.

“If additional capital is not raised, the bank will need to scale back its growth plans and operations during 2010 in order to ensure that regulatory capital requirements continue to be achieved.”

The bank, the only independent Islamic retail bank in the UK established and managed on a wholly Sharia compliant basis, was not immune from the financial problems which beset the banking sector last year.

A significant source of revenue for the bank is the return earned from investing customer deposits on the Islamic interbank market.

It said yields in the interbank markets declined during the first half of 2009 and have since remained at historic low levels, resulting in a reduction in operating income to £1.6m, compared with £4.9m in 2008 and a loss for the for the year of £9.5m, which compares to £5.9m year-on-year.

The bank’s directors implemented specific actions during the year to mitigate the decline in revenues. These included growth in higher yielding customer finance assets and achieving cost reductions through operational efficiencies that saw a number of redundancies at the bank’s head office in Birmingham at the end of 2009.

It said that 2010 had begun in much the same way.

Despite these problems, the bank said the past twelve months had seen strong growth in both customer finance assets and customer deposits.

Among the highlights was a 97% increase in customer financing to £46.2m. In addition, deposits increased by 18% to £186.6m and its customer base grew by 6% to almost 50,000.

The bank, which also secured the Global Finance Best UK Islamic Financial Institution 2009 award, said the economic crisis had reduced revenues throughout the year.

Better news came from the bank’s Home Purchase Plan (HPP) product which achieved strong growth, resulting in a near 100% increase in the customer finance assets.

The HPP range was expanded during the year with a fixed rental product and a product adapted for the Scottish market.

The bank said it was pleasing to note the new business was achieved in accordance with prudent credit policies, and currently there were no arrears within the HPP and commercial property finance portfolios.

The bank said it continued to use retail deposits to fund all customer finance assets and had no reliance on wholesale funding.

Growth in longer-term savings products was achieved during the year with the launch of a wider range of term deposits in July 2009. Continued growth was also seen in the Notice Savings account, launched in 2008.
 
“The challenging market conditions look set to persist into 2010 and the directors and management will continue to identify opportunities to mitigate the adverse effects,” added the chairman.

“We will maintain tight cost control and focus on growth in low risk secured customer finance assets funded by longer-term savings deposits.”