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Sunday, 14 July 2013

Islamic Retail Banking: Coping through challenges to meet customer needs

Globally, Islamic banking is an increasingly visible alternative to conventional banks. Identifying the sources of Islamic banking's expansion and ways to stimulate its continued growth is therefore of interest to policymakers. 

Learning from the current economic situations of developed regions, global financial leader have realised that Islamic banking will not only help under developed and developing countries to catch-up economically, but also stabilise fiscal fluctuations and guard against economical threats even in developed countries.

During the past decade, Islamic banking has grown from a niche market into a mainstream industry. It has also contributed to growth in the Islamic world by drawing the unbanked and underbanked populations into the financial system and allowing risk sharing in regions that are subject to large shocks but few buffers. Islamic banking is not only growing in size, but also in sophistication, with products offered ranging from Shariah-compliant credit cards to insurance and investment products.

Despite the rapid growth in Islamic banking during the past decade, challenges remain, pointing to the need for further reforms and greater harmonization in the interpretation of what is Shariah compliant between Islamic scholars and bankers.

However the limitations faced by the Islamic retail banking sector, may be broader than just the compliance of islamic proceedings. Accoding to John Chang, Head of Consumer Banking - Noor Islamic Bank - Dubai, U.A.E,
"The 3 main limitations faced by the Islamic retail banking sector are:

1.The perception of Islamic Banking being a niche offering to Muslims and that it is not available to non-Muslims.

2. Perceived limited choices and options with regards to products and service and flexibility thereof

3. Slightly more laborious documentation and processes than conventional banking"

The most intriguing contrast between the working of a Islamic Banking and conventional banking is the means of funding. This contrast may project as a threat for Islamic banks if customers are to choose between the two banking systems. 

This concept of has been further explained by Abdulrahman Turki , General Manager: Retail Banking - Bahrain Islamic Bank BSC as he states, "Islamic bank's cost of funding is always on the high said compared to the cost of funding of the conventional banks, The Mudharb is considered as a partner in any investment the bank makes and therefore will be liable for any loses that the bank may incur, thus many customers except to get higher rate on their deposits based on the theory of higher risk higher return.Therfore a collective efforts must be put towards clearing this negative perceptions from customers mind since no bank ever shard the losses with its clients in the last 30 years." 

Global leaders and Islamic banking heads try to investigate and come up with strategic solutions to overcome the challenges and eradicate the same. Musa Shihadeh, Vice Chairman & CEO - Jordan Islamic Bank, shares his view on the effecting chanllenges and also provides corrective measures to curb the same. 

Accoding to him, "The most important limitations or drawbacks faced by the islamic retail banking sector are as follows, 

1. Islamic finance grants rely on individuals' income, and they are usually distributed to cover family and consumer needs of clients etc.

2. Individuals' ( retail) needs for cash finance which is hard to cover through retail islamic finance modes.

3. The need for guarantees in finances granted for individuals( retail finance) which sometimes are difficult for clients to insure.

4. The inability of islamic banks to get any fine in case the clients fail to pay on time. 

The most significant solutions to eradicate such limitations or drawbacks would be to develop current products and update new ones to meet the needs of retail banking clients and to reduce as much as possible the guarantees requested from clients when they are granted the finance."

" Introduction of customer's awareness programs, so the larger audience should take the benefit from the Islamic Retail Banking products. It has been observed in Muslim countries where the Islamic banking has been launched people have very high expectations and low knowledge. This can only be catered through by introducing Customer's awareness programs & campaigns." - Bilal Fiaz, Head of Retail Banking & Branches - Sohar Islamic, Bank Sohar, Oman. As suggested by Fiaz, creating proper awareness and knowledge programmes would help people to understand the proceedings of Islamic banking and the opportunities that retail banking offers. This knowledge itself will remove a lot of doubts and challenges owing to the Islamic retail banking sector and help customers to be more involved and make correct banking choices.

(Zawya / 12 July 2013)

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