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Saturday, 25 October 2008

Islamic banking is reshaping trends

Gulf News/by Nigel Watson

I have been seeing a lot of people opting for Islamic insurance and finance. I understand how Takaful insurance works but how would you compare an Islamic bank with a normal retail bank, from the point of view of the customer?

The growth of Islamic fin-ance - across personal and corporate sectors - is certainly one of the most important trends reshaping the financial world today. In part, this is because Islamic banking provides a vital service for the Muslim community, which accounts for around 1.79 billion of the world's population.

However, as well as fulfilling an existing need, Islamic financial products are also very dynamic and the innovation being shown in the field is creating new market opportunities.

One of these, as you observe, is the number of non-Muslims increasingly drawn to invest, save and insure with Sharia-compliant fin-ancial companies.

Often people are drawn to Islamic finance because it has an ethical dimension. Islamic banks, for example, agree not to invest money in areas like gambling or alcohol. However, there are also financial reasons why people consider Islamic policies, particularly if they see a better opportunity for a return on their investment.

Islamic banking differs from conventional banking primarily because it does not look to charge or deliver interest - you cannot "make money from money." Profit instead is generated through investment and trading.

An Islamic bank traditionally generates its profits from Sharia-compliant investment activity. This profit is shared back with the bank's customers at a pre-agreed ratio. So, as an account holder, you are entitled to a share of these profits according to the funds you hold in your account.

For an Islamic bank to be competitive, this return rate has to match the level of return provided by interest levels of conventional banking, and it's here that a consumer can best assess which account, financially, is the most suitable for them.

Charge interest

Look at the return rate offered by the Islamic bank and compare it to the standard rate of interest provided by a conventional bank. As discussed in an earlier column, this can be assessed most effectively by looking at the "Annual Percentage Yield", which will make it easier to compare different rates if they are calculated at different frequencies. You should also look at the costs of the account. Obviously, Islamic banks don't charge interest if you go over your agreed limit. However, they will charge administrative fees, which can be as much as, or even higher than conventional bank interest.

You should also compare the different features offered by the different banks. One of the reasons for the recent growth of many Islamic banks in Europe and the Middle East has been a strong focus on customer service. Customers have commented that the banks treat them "as an individual," and value their custom.

In all, a big part of your choice will probably be dictated by your comfort level and determining how well the particular bank account matches your personal beliefs. However, it's also worth doing the maths, and making sure the account is giving you the best possible return.
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