A swathe of digital banks targeting specific demographics have sprung up in recent years. In the US, examples include Greenwood, focused on serving black Americans; Cheese Financial, aimed at the Asian community and Majority, serving immigrant groups. Daylight, an online banking provider focused on the LGBTQ community, shut down in 2023.

Across Europe, Triodos Bank is a Netherlands-based bank that says it will only lend money to organisations that are committed to making a positive social change while in the UK Oxbury has a singular focus on British farmers.

Next cab off rank

The next cab off the rank could well be soon-to-launch Ethos, a digital bank which is primarily, but not universally, targeting the four million UK Muslim community with Shariah-compliant banking services.

Earlier this week, a press release was issued saying that Ethos was working with Thought Machine, which develops cloud-based banking software for Lloyds and JP Morgan, to launch a bank, kicking off with savings accounts and mortgages.

The remit of Ethos Venture, Ethos’s parent company, is to launch “inclusive” financial services products, according to its co-founder and CEO Hasan Raza, a former investment banker with HSBC and BNP Paribas.

Ethos Ventures, founded in 2020, says it has “built a team of over 20 world-class experts spanning retail and wholesale banking, investment banking and private equity”. Raza says Ethos Ventures has previously tried and failed to buy existing banks, so has now turned to launching its own.

Financing behind the digital bank comes courtesy of investors from the UK, the Gulf and South East Asia, says Raza, though he does not share specific funding numbers.

Awaiting UK banking licence approval

Ethos applied for a full FCA and PFA UK banking licence in October last year and says its application is at a “mature stage”. Its decision to kick off with savings and mortgages marks a left-of-field manoeuvre, given the received wisdom is to start with current accounts.

Raza says: “Most startup banks, if you look at Monzo and Starling, they began with transactional banking. And the hard bit, creating a lending book which is where banks make long-term income, they didn’t do until much later down the line.

“We began with let’s do the hard bit first. If we can crack that, then not only does that solve problems for a lot of people, which is our raison d’être but it also creates a culture within the company to do hard problems.” He also says that one of the biggest pent-up demands in the Islamic market in the UK is to buy a house.

Shariah-compliant banking

But what does Shariah-compliant banking mean? Shariah is Islam’s legal system. Shariah banks use money in a manner which adheres to Islamic law and beliefs. This means banks don’t charge interest for debts and savers can’t earn interest from deposits.

On savings accounts, Shariah-compliant banks will invest the money the customer deposits. But they won’t invest it in anything the Shariah law says is harmful. The bank will then pay the customer part of any profit it earns.

On mortgages, instead of a traditional mortgage, Ethos will offer customers the chance to buy the property with Ethos, in what is called a ‘musharakah’ (partnership) contract. Then over time the customer gradually pays the bank for its share of the property.

Competition

On competition in the market, HSBC closed its Islamic retail banking operations in the UK and several other markets amid cost pressures and weak demand. Lloyds had an account known as the Islamic Current Account, but this is no longer available.

Gatehouse Bank, a UK-regulated Islamic bank headquartered in London, offers Shariah-compliant mortgages while non-bank lender Pfida also offers Shariah-compliant mortgages. Raza says the Shariah-compliant competitors are expensive.

Muslim community want alternative

But how big is the Muslim community demand for Shariah-compliant banking? Raza says (like many Muslims) he uses a mainstream bank.

He adds: “But if you gave me the alternative. If you said ‘look I want to buy a house, I either pay a massive premium here and stick with my principles or I hold my nose and go to Lloyds.’ I will hold my nose and go to Lloyds.

“But if you told me ‘there are two banks. One offers a much better service than the other. It is purely digital and by the way you don’t have to compromise a penny on price, and you don’t have to compromise on your principles.’ It’s not a hard decision for me to make.”

He says “the demand is really palpable”, saying young Muslims want digital services, which are price competitive and allow them to hold their principles.

Niche player but opportunity to grow

Raza says Ethos will be a niche player to start with but has plenty of opportunity to grow beyond the Muslim community. He points out that Ethos is an “inclusive bank” open to everyone, pointing out that many people want to buy houses. He says: “If we wanted to be fully Muslim targeted, this would have had an Arabic name.” 

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