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Thursday, 12 June 2008

Crossing over: Islamic banking needs to reach out to new customers

Islamic banks will have to become increasingly innovative if they want to gain a bigger share of the market says Nicholas Brewer

As the Gulf nations reap returns from oil prices, and economies in Asia continue to grow on the back of economic liberalisation, demand for Islamic banking is surging across the Muslim world and beyond.

Islamic banking may have its strongest roots in the Muslim countries of the Middle East, but the industry's innovation is focused on Pakistan, Bangladesh and South East Asia, where countries with both Muslim and non-Muslim populations present an interesting cross-over market.

In Malaysia, for example, non-Muslims are major users of Islamic finance products. Banks such as the Hong Leong Islamic Bank, and the Malaysian cooperative bank, Bank Rakyat, report a 70 per cent uptake of Islamic financial products by Chinese customers. So, why are non-Muslim customers attracted to Islamic banks?

Customers of any religion will be attracted by a financial return that competes favourably with the interest rate at another bank. Like any other financial institution, Islamic banks work to deliver the same marketing, customer service and, crucially, competitive products.

Shari’ah prohibits usury and trade in forbidden goods such as alcohol and pork. In line with this, Islamic banks offer a fixed profit rate resulting from investment in Shari’ah compliant trading activities. Additionally, in Islamic mortgages, the bank can share some liability. This presents a more cost-effective and appealing product for some customers.

Within the commercial sphere, Ijarah is a leasing concept that offers financing options for commercial assets at a fixed price for a fixed period. In addition, many Islamic business ventures use trade finance which can be arranged without interest.

Islamic banking has no central detailed rule book for the modern application of Shari’ah . It comes down to a Shari’ah committee composed of Islamic scholars to determine acceptable banking practice at either bank or national level. Some theorists suggest that if a bank sells both Islamic and non-Islamic products and books both instrument types in the same legal entity, this creates an unacceptable mix of different profit streams. But other scholars maintain that as long as money is segregated internally, the products and the bank can still be Shari’ah compliant.

Banks such as HSBC and Citi have established their own Shari’ah committees. Large banks have a global brand and can establish operations running at some loss with considerable investment. But in contrast, regional, specialised Islamic banks like Bank Islam and Gulf Finance House are more focussed, have local knowledge, a deep understanding of the community and can connect more directly with their client base.

HSBC, which offers Islamic banking services across the Arab world, has a strong customer base in Malaysia. HSBC's widespread branch distribution and competitive products may explain why over half of its Islamic banking customers in Malaysia are non-Muslim.

Islamic banks should continue to remember that while they are rooted in Islamic tradition, competitive banking products are vital to sustain growth. Firstly, there are customers who will always choose purely Islamic banks on ethical grounds. In the middle ground there are those for whom Islamic banking is preferential, but not if the service offers too poor a financial return when compared to non-Islamic alternatives, and there are also non-Muslims who are open to any attractive financial product. The latter two groups present a far greater opportunity than the first and as such, constitute a priority focus for all banks offering Islamic banking services.

This article originally appeared on gtnews.com.


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