Post crisis Islamic banks must revise business model
A growing global sentiment around ethical and socially conscious businesses is emerging. Large segments of the world’s consumers are showing a preference to work with businesses that are socially conscious. Six years after the economic crisis there is still much cynicism and anger directed at the conventional banks. People across the globe have a hunger for a more ethical, transparent and robust financial system. This has opened a window of opportunity for Islamic banks to emerge as a values-driven alternative to conventional banks, for those who seek a wholesome banking experience.
But can Islamic banks truly offer the world a better way of banking?
Global Islamic banking assets are put at $1.8 to $2 trillion. But, the truth is no one knows the exact size of the market, since there is no industry institution that keeps track of the data. However, we can be certain on a global scale Islamic banking is a niche product, accounting for little over one per cent of the world’s financial market.
So, even though Islamic finance boasts impressive annual growth rates of 15% to 20%, there is no real tangible evidence that Islamic finance is a global force, or about to become one. Islamic Bank deposits are minuscule compared to those held by conventional banks. In addition 80% of Islamic banks have a market capitalisation of less than US $25 million. And, if we consider the situation in this region, despite the financial strength of the GCC countries, conventional financing still represents the greater part of the debt market.
So why, 40 years after the emergence of Islamic finance, has Islamic finance failed to displace conventional finance in almost all Muslim dominated countries, and is marginalised in the rest of the world?
Few can dispute that the lack of standardisation has held back Islamic finance. There is increasing recognition among Islamic banks that there is a need for balanced regulation that does not impede growth, or allow for abuse. But disagreement and different interpretations over what is Shari’a compliant, and what is not, make it difficult to develop globally accepted products. Even at a national level there are inconsistencies. At Noor Bank we have found ourselves in situations where we have entered a syndicated corporate loan with four other UAE Islamic banks, to find we can only get approval from three of the four banks’ Shari’s boards. If Islamic banks want to offer a better way of banking, these inconsistencies must be eliminated.
But there is a far more fundamental issue that today’s Islamic banks need to address.
Catching up with new trends
Islamic banks are conservative and traditional by nature. They rarely change their ways, unless it is to catch up with new trends that are profitable. But, as an industry, we can no longer ignore the changes that are taking place in society. If Islamic banks are to offer a better way of banking for the world, we must first recognise that the world has changed.
To date Islamic banks have largely imitated conventional financial products. As a result, new asset classes have become accessible to Islamic investors, enabling them to access risk and return profiles in previously untapped areas. But, copying and adapting conventional banks’ products and services, adds little or nothing to the value proposition. Why should a customer choose an Islamic bank over a conventional bank, if there is, in reality, little or no difference between the two, especially if the Islamic alternative costs more?
If Islamic banks truly want displace their conventional counterparts, it is time to rethink their purpose and business model. Of course, Islamic banks should offer customers products that meet their needs, while at the same time improving the customer experience and reducing costs. But in line with our Islamic values, we should also mobilise wealth for the good of society and bring the financially disenfranchised into the real economy. Providing for the common good is a powerful message that Islamic banks should claim for themselves.
Confidence in conventional finance is at an all-time low. This has created an increased appetite for ethical finance. The absence of riba, or interest, in Islamic finance, should make it appealing to those who feel conventional banks have abused their trust. The opportunity is there to be grasped. But unless Islamic banks clearly define their differences from conventional banks, in moral and value terms that appeal to, and are easily understood by Muslims and non-Muslims, the promise that Islamic banking can offer the world a better way of banking will have no more substance than a mirage in the desert.