Let’s not forget the voice of the Islamic banking customer
It is easy to get caught up in the endless debate over why Islamic finance has not readily embraced a centralised approach to developing common transaction structures, or why progress in the standardisation of documentation and processes at a global level has been so slow. Despite the good work of various organisations such as AAOIFI (Accounting and Auditing Organization for Islamic Financial Institutions), IFSB (Islamic Financial Services Board) and IIFM (International Islamic Financial Market), we still find most Islamic financial centers at differing stages of development. While the difficulty of attaining these goals cannot be underestimated, discussions on industry development tend to focus mainly on regulation and standardisation. Important as these are, I am left wondering what the role of the customer is in this whole process? Could the future of Islamic finance be better served by simply placing more focus on customer needs to drive innovation and growth? In other words, who should drive the growth of Islamic banking — the regulators or the customers?
Islamic banks operate under the governance of a Sharia board that serves to ensure customers are not misled in the compliance of their financial transactions, judged against approved standards. This means, development and innovation are primarily the domain of the bank and Sharia board, whereas, I believe, Islamic institutions would benefit by finding ways to be more inclusive of customers in this process, and being more flexible and proactive in finding solutions to their requirements. Flexibility does not mean compromising Sharia standards, but it does mean adopting a methodology to better understand financial requirements and improve response times, so that decisions can be made in a timely and efficient manner. It’s possible that this type of bottom-up approach based on customers’ needs could contribute to faster development of commonly accepted regulatory frameworks and standards.
Running a Treasury department means taking care of customers who are typically businesses or wealthy individuals, as well as managing the bank’s own financial needs. Each customer has a different level of willingness, or tolerance, to enter into Islamic financial transactions. Some bank in a Sharia compliant manner no matter what, while others will not compromise on cost or structure if it is not competitive with a conventional alternative. However working in this region I have come to understand that a great many would, all things being equal, prefer to be participating in Sharia compliant transactions. If the industry can bridge the gaps between customer needs and Islamic product offerings, growth and standardisation should follow.
We are living and working in a region that is undergoing strong economic growth and social development. Similarly, our customers’ financial needs and aspirations are developing and ever changing and many would like to fulfil their financial needs through products structured under Islamic rules. It is no stretch to imagine that the financial institutions which are able to understand this, and organise themselves accordingly, will be most likely to succeed. This organisation will include the responsibility to drive the necessary legal and regulatory changes, all derived from a basis of customer needs.
At Noor Bank we believe we have made a good start in the journey to improving the voice of the customer. We don’t expect to land the next jumbo-sized complex derivative transaction from the largest corporate clients, but are increasingly structuring more sophisticated transactions for customers. It is in the middle markets and SME segment where we are finding customers who have financial risks that they want to manage. It is only by having a relationship with these customers and listening to them that you can start to understand the type of Islamic structures that the market needs. On the investments side, we are also seeing a significant expansion in the type of products that customers are seeking exposure to. For customers that are adequately aware of the transactions they are entering, and have the appetite for the associated risks, there are many Sharia compliant options beyond a standard fixed-term wakalah or murabaha investment.
Equipped with a better understanding of customer needs and generating genuine customer demand, we are able to engage in the type of innovation that will contribute to the growth of the Islamic banking industry. As we satisfy customer requirements, we can also introduce the tools that will help to form standardisation across the industry. The adoption of the Tahawwut Master Agreement (TMA), developed by the International Islamic Financial Market (IIFM) to govern hedging transactions, is one such example. And as banks manage their own risks and balance sheet needs more effectively and efficiently, based on customer activity, this and similar tools will grow in acceptance and use.
There remains a great deal of work to be completed in forging a unified global Islamic banking industry, operating to commonly accepted standards. Banks and regulators are an important part of this development but we cannot ignore the needs of our customers in this process. Embracing their challenges and understanding their needs would help to accelerate the process of achieving common platforms and standardising products and agreements.