• David Grammig


Updated: Jul 3, 2019


The 2008 financial crisis and the resulting £500 billion bailout of United Kingdom ("UK") banks has left their reputation in tatters. A 2015 survey by The Guardian found 53% of Britons had low trust in banks. This, on top of poor service and high fees, emboldened new entrants to the sector. Metro Bank became the first to receive a high-street license in over 150 years. 

The Financial Conduct Authority ("FCA") pivoted its historically conservative stance and adopted the Financial Services Act of 2012. Its objective is ‘promoting effective competition in the interests of consumers in the markets for regulated financial services’. With encouragement from the FCA for sector-deregulation and a new stream-lined process for granting banking licenses, online-only banks began to emerge from 2015. They are collectively known as 'Challenger Banks'.


The new breed of internet-only, customer service centric banks are dubbed challenger banks for their 'challenge' of the traditional 'big four' banks (Barclays, HSBC, Lloyds Banking Group and Royal Bank of Scotland Group). Many of them started from humble beginnings, partially crowdfunded, and have transformed into multi-billion dollar enterprises (Monzo was just valued at over $2.5bn in their latest round). 

Challenger banks have had great success, particularly in London, and particularly with Millennials. With wind at their backs, they have begun their march into Europe and beyond. While the success of these banks is indeed breathtaking, they have yet to make sweeping strides outside their core following.


Our overarching goal is to create a challenger bank focused on the needs of the Muslim community, first in the UK, followed by the remainder of the European Union ('EU')/European Economic Area ("EEA"). 

We will use this base, and the repertoire stemming from being a European regulated bank, as a launchpad to other geographies - whether greenfield or alongside local partners.  The six largest Muslim countries account for one billion Muslims. Even a single license secured in any of these would be enormous.  THE MUSLIM OPPORTUNITY Islamic law prohibits usury, defined as interest paid on all loans of money, and forbids investment in 'vice' sectors. While a large number of Muslims in Europe do use traditional banks, many do so for lack of option. Some simply stick to cash.  Muslim families have other unique characteristics. In Europe, they are clustered in specific geographies and are community-focused with weekly/monthly gatherings celebrating holidays and social events and discussing religious topics. They also have an acute sense of civic duty and charity (also a Muslim dictate).  There is a large emphasis, particularly by South Asian Muslims on savings, and by this group as well as Arab Muslims on home ownership. Once an initial home - the center of family life - is purchased, goals shift to securing homes for each child, and towards buy-to-let investment properties.  Remittances to family members still in the 'home country' are understandably frequent, and seeking yield through investments in these countries is common. Banks largely ignore these attributes, leaving many Muslims under-banked or uncomfortable with their banking choices.  WHY EUROPE The EEA (which includes EU member states, the UK, Norway, Iceland and Liechtenstein) has about 28M Muslim residents. As a base case, according to Pew Research Center, the number is set to double by 2050. This population can be served with just two bank licenses, one for the UK, the other for the remaining countries.  The path paved by the FCA and other successful start-up challenger banks in the UK is highlighted above. While on the European continent, Lithuania has adopted a fintech-friendly stance. It offers to grant applicants pan-European banking licenses within 6 to 12 months with required equity capital from €1 million. In the UK, a license provides government insurance for client deposits of up to £85,000 per person, per bank (£170,000 for joint accounts). The EU insures deposits up to €100,000.  Importantly, the brand value and ensuing trust from being a bank originating and regulated in the UK and Europe would underpin our ability to secure licenses and to successfully launch in subsequent markets. MARKET RESEARCH & COMPETITION We sent an exploratory team from the community with origins from the Middle East and South Asia. In the process, we interviewed over 60 Muslim families from Pakistan, India, Algeria, Morocco, Saudi Arabia, Kuwait, Turkey, Nigeria, Syria, Lebanon and mixed-origin families. We went from London up to the north of England and its Midlands, to Paris and Marseilles, and to Munich and Nuremberg.  The research cemented our existing knowledge, but also provided some surprising findings on higher than expected wealth and saving levels, risk appetite and commitment to charitable causes as highlighted in part above.  On competition, the landscape is not empty, but current banks offering Islamic products suffer from poor branding, inefficient underwriting and an uncompetitive product vis-a-vis traditional banks.  Several of the focus group families were unsure whether HSBC was still in the Islamic banking market, but Al Rayan Bank (a UK based Qatari-backed bank with a number of branches throughout the country) did come up a number of times.  Unequivocally, Al Rayan was described as charging fees - effectively their return on the loan - that are far above high-street bank interest rates. It demands initial deposits of more than two times traditional banks and subjects clients to application processing times that are excruciatingly slow. Further, their outreach/distribution was deemed poor, and our analysis found their cost-base far higher than it could be. Despite all this, they are hugely profitable.  OFFERING Our proposed challenger bank will focus on the community, its banking needs, and its civic custom of both ethical investing and charity.  Branding is central. It is an area of particular weakness of businesses both originating from and targeting the community. We are working with creatives to develop an energetic brand with customer experience and 'feelings' at the center of the offering - a brand that stems from the needs of the community, for the community and one that gives back to the community.   We aim to be tech-focused and asset-light to keep costs down and to remove inefficiencies - no branches, and with an efficient workflow for all processes/services. A team will reach out to the community through informational, educational and charity events to familiarise families with the brand and the offering. While this high-touch approach may seem to be a disadvantage compared to banks that simply use passive advertising, the trust instilled coupled with an outreach to community leaders/influencers should make for viral distribution.  The initial services planned are checking, savings and investment/mass-market private wealth accounts, as well as residential and commercial mortgages for residents and foreign investors, and payment processing for small merchants.  Culturally-beloved chit (a type of group savings) accounts and the facilitation of charity contributions will be integrated into the platform. THE INVESTMENT AND SEED INVESTOR BENEFITS We estimate that to secure an 'Electronic Money and Payment Institutions' license in the UK (which would allow a checking account offering) would require £8M pounds of investment, with a full banking license for both the UK and EU/EEA 12-15 months and around £6M pounds from that point. These estimates include a customer acquisition scale-up.  Momentarily ignoring the venture capital frenzy we currently live in, and assuming traditional valuation methods, we estimate a UK Muslim-focused bank to be worth £150M. Add in the rest of Europe, and £500M is well within reach. Any other license attained is further upside.  Along the way, a tie-up or partial exit to strategic investors/regional banks may be considered to fuel growth, and customer insights would allow for a distribution platform for other Islamic offerings.  Early cornerstone investors will not only hold an economic stake in the business, they will enjoy all the benefits of access to bank licenses in Europe. Importantly, they will also be giving back to the community at large.  Close to 138 million people in Europe are outside the formal banking sector according to Mastercard; and an Oxford study finds that climbing the financial ladder makes for an increased sense of belonging and loyalty to the country one resides in.  With an offering aimed at improving the Muslim community's access and use of financial services (and accordingly their financial standing), and with an emphasis on charity and ethical choices, we hope our proposed bank - in its own little way - will help with the gelling of cultures across the region.  We would appreciate your feedback and a chance to discuss the investment opportunity further. 

In case of interest please contact david@grammigadvisory.com and we will forward your inquiry - anonymously if you wish.

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